PPF Offers 1% Interest Loan: Know Why You Shouldn’t Take Advantage Of This Loan
Loan Against PPF account at 1%: Know the key points
New Delhi: A public provident fund or PPF is a long-term savings commitment that an investor is likely to make to meet future financial needs. But as it is, you can face a crisis situation at any time and need short term funds. In such a situation, PPF can be an easy option to use.
The PPF account, although blocked for 15 years, offers a facility of loan and partial withdrawal before the end of the mandate.
While a loan from the PPF account can be used between the third and sixth fiscal year of opening the PPF account, the PPF partial withdrawal facility is allowed from the seventh year.
Loan Eligibility Against PPF: To apply for a loan against PPF, your PPF account must be active. Thus, there is no need to specify here that a deactivated PPF account will be ineligible for the loan. The deactivation may be due to a reason such as non-payment of the minimum annual contribution.
Chronology: After opening the PPF account, a subscriber can benefit from the PPF loan from the 3rd to the 6th year.
Interest rate: Subscribers will have to pay 1% interest on the loan amount. But the total cost of the loan is huge! It is necessary to renounce the interest received on the PPF, the real cost of the loan will be higher, that is to say the interest rate of the PPF plus the 1% interest that you pay on the PPF loan. Now it is much cheaper than the personal loan which is even higher considering the current PPF rate of 7.1%. In the event of a loan, the PPF subscriber will not receive any interest (to the extent of the loan amount taken) until the principal amount plus interest is repaid.
Term of the loan : 36 months, that is, the repayment of the loan must begin after the period of 36 months or 3 years.
Refund: If the subscriber does not repay the loan amount withdrawn from the PPF, the interest rate rises to 6% while all other standards remain applicable until the loan is fully paid. Repayment can be made by lump sum or by two monthly installments. Once the principal is repaid, the interest at the rate of 1% must be paid in two monthly installments or as a lump sum payment.
What loan can you benefit from?
You can get a loan on your PPF balance from the third year and up to the sixth year after opening the PPF account. The loan amount is limited to 25% of the PPF account balance at the end of the 2nd year or the year preceding the year of application of the loan.
Should you benefit from the PPF loan?
The PPF loan is available at an interest rate of 1% but you will forgo the accumulation of interest on the loan amount. So the actual cost of a PPF loan is the PPF interest rate plus 1%. At the current interest rate, a PPF loan would cost you 8.1%.
Second, you lose the cumulative effect on the amount of interest lost due to the loan. It should be mentioned here that the loan to a PPF account is available between the third and sixth year of opening the account. As the PPF loan is only available in the first part, the cumulative effect of lost interest will be very high at maturity, according to financial planners.