You can get cheaper loans on your PPF account, here’s how
The Public Provident Fund (PPF) is not only a great way to invest, but it also has many other advantages. In addition to saving taxes, one of the main advantages of investing in a PPF account is that you can take out a loan against it. A loan against PPF is very useful in times of need as it is readily available.
Trouble can approach anytime. In such a situation, to make up for the lack of money, we intervene in the loan process, but you cannot get any unsecured loan because in return you have to give something to the bank. However, in order to take out a loan against PPF, you do not need to pledge anything.
In addition, taking out a loan against PPF is also cheaper and its interest rate is very low.
The loan can be taken out on PPF after the completion of one year from the end of the fiscal year in which you opened the account and before the completion of 5 years. Remember that after the completion of 5 years of the PPF account, money can be withdrawn from it. But once you start the withdrawal, you cannot take out a loan against PPF. At the end of the two years preceding the year in which you apply for the loan, up to 25% of the amount in the PPF account can be used for the loan.
When taking out a loan against PPF, the principal amount of the loan should be paid first and its interest paid later. The principal amount can be repaid in two or more installments or monthly installments. Remember that the principal amount of the loan must be paid by the account holder until the end of 36 months from the first day of the month in which the loan is taken.
The effective interest rate of the loan is only 1% higher than that of the PPF. PPF currently gets 7.1% annual interest. In other words, if you take out a loan, the interest rate on the loan will be 8.1%. Interest can be paid in two IMEs or as a lump sum. If the principal amount has been paid on time, but part of the interest is due, then it is deducted from your PPF account.
If the loan is not repaid or only partially repaid within 36 months, the remaining loan amount will bear interest at the rate of 6% per annum. This interest of 6% will be from the first day of the following month during which the loan is contracted, until the last day of the month during which the last installment will be paid. In other words, if the loan is not repaid within 36 months, the interest rate which was previously 1% will become 6%.
Interest on the outstanding loan will be debited from the holder’s account at the end of each year if interest is not paid by the end of the 36 month period. If the account holder dies, his agent or legal heir will pay the interest on his loan. If your PPF account is not active, you cannot take out a loan against it. Apart from this, as long as the first loan taken out on PPF is not repaid, the second loan cannot be taken out.