A comfortable life without a sudden, unannounced financial emergency may seem too far-fetched. A sudden financial crisis may stare hard at anyone, and one may find himself in dire need to arrange for a loan to meet the expenses.

Personal Loans are famous for their ease of access and hassle-free processing. The circumstances under which they are availed make it even more interest rate agnostic, despite the high-interest rate. Personal loans are one of the most straightforward and most convenient sources of finance available.

Being unsecured and perceived riskier, the individual loan interest rates are higher than other retail loans available. Another option available in a financial emergency is a Loan against PPF (Public Provident Fund). 

Personal Loan Vs. Loan against PPF Account – Key differences

Loan Amount

The need for finance is the primary factor for a loan. Since there is no caveat attached to Personal loans in terms of the loan amount, the maximum amount that one can avail by way of a personal loan is high, as it depends on the salary and repayment capacity. But a loan against PPF is restricted to 25 per cent of the amount available in the account at the end of the second year preceding the year of a loan application. E.g., if you want to avail of the loan today, in 2022, you can avail 25% of the balance in your PPF account at the end of 2020.

Repayment tenure:

A loan against PPF is a short-term loan, with a maximum tenure of 36 months—which may make the EMI higher for the same amount, considering the repayment term is considerably less. Whereas personal loans can be availed for 5-7 years, making the monthly repayments affordable.

Interest rates:

Personal loans come with generally high-interest rates, as they are unsecured loans. The Personal loan interest rate may vary from 10-15% per annum. However, loans against PPF carry an interest rate of 1%. This implies the EMI will be considerably less when compared to personal loans. However, the amount availed as a loan against PPF will stop earning PPF interest, making the effective interest rate on the loan 1 % higher than the prevailing PPF interest rate.

It may or may not necessarily be lesser than personal loans, given that most financiers have attractive personal loan interest rates for borrowers having salary accounts with them.

Ensure that you compare the EMI using the personal loan EMI calculator to decide between the two.

Frequency of borrowing:

Loans against PPF can be availed only once a year, whereas there is no such restriction in the case of personal loans.

Processing time:

Personal loans are hassle-free and quick to process. They can be processed within 24-48 hours, unlike loans against PPF.

So, which of the two should be chosen? 

Go for a loan against PPF if:

  • It has a lower effective interest rate than personal loans.
  • You will be able to repay it within 36 months.
  • The loan amount will suffice your financial need.
  • There is no urgency or time constraint to get the loan.

PPF loans are the best choice when the loan requirement is not high or to meet some minor planned expenditure, e.g., a vacation, a gift or a bill. If the expense is high, like a foreign holiday or a massive medical expense, the obvious choice is a personal loan, where you can get a higher loan amount, for longer repayment tenure, within 24-48 hours. Weigh in these pros and cons before deciding on the loan to finance your expenses.

Eve Nasir