Which is Better – Personal Loan or Chit Fund?

One of the basics of financial planning is to have an emergency fund wherein you accumulate three to six months of expenses in an easily accessible liquid form, be it a fixed deposit or your savings bank account.

But what if you do not have an emergency fund and are in need of money urgently? 

Some of the popular options that most individuals go for in such circumstances are availing personal loans, borrowing from family or friends, or going for a unique informal loan called Chit fund. 

But is a personal loan better than a chit fund?  Let us find out!

What is a Chit Fund?

Before comparing a chit fund vs. bank loan or personal loan, let us understand what a chit fund is. 

Chit Fund is a uniquely South Asian scheme of saving and borrowing and works as both a credit as well as a savings product. In this scheme, a certain number of people contribute towards a certain predetermined chit value. The duration of the scheme will be equal to the number of members.

The amount that is collected is given to an individual either through a lucky draw or through an auction.

An open auction system is conducted to determine the lowest sum a subscriber is willing to take that month and the rest distributed among the rest of the subscribers after subtracting the organizer’s fee.

The process repeats, distributing the auction amount to one member each month. All of the other subscribers, including the ones who took their share in a previous month, continue paying the monthly instalments.

Personal Loans on the other hand are a widely known fairly simple product.

They involve the borrower availing a certain amount of money from the lender (banks or NBFCs). This amount is then repaid to the bank through monthly installments known as EMIs (Equated Monthly Installments). The EMI will consist of the principal as well as interest amount.

To know more about personal loans, click here .

How do you choose between a chit fund and a personal loan?

There are enough debates on the matter but below are the five parameters that you must consider:

1. Complexity

As you can see from the above definition, chit funds are a fairly complex product. Also, every month you are in competition with the rest of the members for the ‘chitty’ or the lump sum amount. 

Unlike a personal loan which comes with a fixed predictable repayment period, the repayment period for a chit fund and amount depend on the number of members and is not fixed.

2. Interest rate

With personal loans, you know exactly what you are getting into with the rates being explained upfront. Also, personal loan interest rates vary and can start as low as 1.33% per month.

In case of a chit fund, the Interest rate or the cost of capital can vary depending on the price at which the chit fund is auctioned in the month that you require a loan.

3. Accessibility

A personal loan is available not just from banks but other NBFCs including Money View . This wide scale accessibility makes personal loans an easier bet in case of need, rather than chit funds.

Chit funds on the other hand are a closed user group activity and not everyone has access to it. Neither are they universally accepted.

4. Processing Time

Personal loans can be availed quickly. Certain lenders such as Money View even offer loans within 24 hours of loan application approval.

On the other hand, the processing time for a chit fund can vary. If an auction has recently taken place, then the processing time for a new fund may take up to even a month.

5. Trust factors or security

Personal loans are strictly regulated by the RBI as well as other governing bodies. There are set rules and regulations in place to ensure that lenders as well as borrowers are protected. 

Additionally, most online lenders today use state-of-the-art technology that prevents scams and ensures safe loan transactions.

The biggest concern with chit funds is the aspect of security. While chit funds are supposed to be registered and regulated by the respective State Governments under the Chit Funds Act, 1982 there are a lot of unregulated funds that carry out the activity underground.

In Conclusion

While chit funds are popular and have been around for a long time, individuals need to subscribe to this scheme with caution. 

Personal loans on the other hand are a lot more advantageous, secure, easy to avail, and are disbursed quickly especially by lenders such as Money View . 

If you need funds urgently, then applying for a personal loan from Money View is definitely an option you must consider. Download the app or visit the website to apply today.