Loan against PPF Account

The Public Provident Fund (PPF) is a savings account in India that allows investors to make small deposits while receiving tax-free returns on their investments. PPF accounts allow subscribers to take out personal loans against their available balance at a competitive interest rate without pledging collateral.

What is the Eligibility for a Loan Against PPF?

Every PPF account holder who has an account that is within the defined period is eligible for the PPF loan. This selected time spans the third through sixth years of the account.

Key Factors to Consider Before Taking a Loan Against PPF

When applying for a loan against a PPF account, the following factors must be considered:

• Only 25% of the investments made at the end of the second fiscal year preceding the year in which the loan was applied for are eligible.
• Before you can get the second loan on your PPF account, you must first pay off the first one (in case you plan to take more than one loan on your PPF account).
• The interest rate on the loan is set to be 2% higher than the interest rate on the balance in the PPF account, implying that changes in the interest rate on the PPF account affect the interest rate on the loan against the PPF account as well.
• It should be noted that once an interest rate is set for a loan, it does not change until the loan's term expires.
• If the account holder does not repay the loan within 36 months, the applicable interest rate will be 6% higher than the interest earned.
• If the borrower repays the principal amount but fails to repay a portion of the interest amount, the remaining amount will be deducted from the individual's Public Provident Fund account balance.
• The principal amount must be repaid first, followed by the interest amount, which must be paid in two monthly installments or less.
• It should be noted that a borrower cannot apply for a second loan unless and until his first loan has been completely repaid.

Related Pages: How To Open PPF Account

Taking Loan Against PPF Account - A Case Study

Let us look at a real-world scenario where Mr Kumar opens a PPF account on April 2024:

Benefits of a Loan Against PPF Account

PPF account benefits are numerous, and a loan against your PPF account is beneficial in a variety of ways. Here are some of the main advantages of doing so:

No Collateral or Mortgage is Required

When taking a loan against your PPF account, you will not be required to pledge any assets as collateral.

36-month Repayment Period

The loan can be repaid in 36 months. This timeline begins on the first of the month following the month in which the loan is approved. For example, if the loan was approved on January 25, 2018, the loan term of 36 months begins on February 1, 2018.

Low-interest Rates

One of the most significant advantages of taking out a loan against your PPF account is the low-interest rate. Interest rates are significantly lower than those of traditional bank personal loans.

Flexibility in Repayment

The loan's principal amount can be repaid in two or more installments (on a monthly basis) or as a lump sum.

Disadvantages of a Loan Against PPF Account

While a loan against PPF serves as a respite in times of financial hardship, it has its fair share of disadvantages too. 

• PPF account holders will not earn any interest on the remaining balance until the loan is repaid in full. 

• Since only 25% of the PPF amount available can be availed as a loan, it may or may not satisfy your necessities.

• Additionally, the short repayment tenure, i.e. 36 months or 3 years, makes it hard for many to repay the loan in full.

• In case the loan is not repaid in full within the stipulated time, the interest rate increases.

• Moreover, if the interest rate is not paid, it will be deducted from the PPF balance, causing you to lose your hard-earned money.

Interest Rates for Loans Against PPF

The interest rate on the loan against PPF has been set at 1% higher than the accrued interest on the PPF balance. As a result, the interest rate on this loan is subject to fluctuation. 

The PPF interest history has fluctuated depending on the market. The current annual PPF rate of interest 2023-2024 or PPF rate today is 7.10%. Hence, the interest rate on a loan against PPF is 8.1%.

Repayment Terms for PPF Loans

The loan is repayable in 36 monthly installments. If the loan is not repaid within 36 months or is only partially paid, the interest rate will be increased to 6% higher than the PPF account interest rate. 

The principal loan must be repaid first, followed by the interest, which must be paid in two installments or less. 

If the borrower repays the principal amount but not the accrued interest within the loan term, the outstanding amount will be deducted from his PPF account.

A loan against PPF comes with several benefits. However, it has several drawbacks as well. When you are in urgent need of funds, a loan against PPF can be your saving grace as it comes at a lower interest rate than a personal loan. Make sure you understand the terms involved before going for a PPF loan.