Financial emergency is a common situation witnessed by even the most ardent financial planners. From the average person to the high net worth individuals, monetary crisis can happen to anyone. It is not about avoiding the financial crisis that separates good financial planners from the rest, but the way to successfully combat a financial crisis. Most people when faced with a financial crisis look at ways to generate credit. The most obvious ways used by a large majority include expensive personal loans and credit cards. With a high amount of interest attached to a lot of these credit raising financial tools, sometimes the lesser known ways to raise cash are often overlooked.
Loans against fixed deposits or loans against Public Provident Fund or PPF are two such options that can allow easy availability of cash to bypass temporary financial crunch with low interest rates. Let us take a look at various ways in which Public Provident Funds can help us tide such financial emergencies.
An Overview of Public Provident Fund:
Public provident fund is a financial scheme promoted by the government of India to help investors indulge in long term saving. Public provident fund of PPF as it is commonly known allows individuals to earn regular interest with tax free returns. PPF accounts expire after every 15 years and can be extended for a further period of five years as per the account holder’s desire. PPF may sound like a dormant investment saving scheme, but acts as a good retirement tool for a large number of people especially the ones without any structured pension plan. The minimum investment under a PPF account is fixed at Rs. 500 while the maximum deposit is limited to Rs. 1 Lakh. PPF accounts can be opened at any branch of the State Bank of India (SBI) or branches of its associated banks along with all post office branches making it suitable for a vast number of rural customers.
Withdrawal from PPF:
While the full amount is eligible for withdrawal only after the termination of the lock in period or maturity, people have the option of premature withdrawal limited to certain conditions. In terms of financial crisis, partial withdrawal from PPF accounts can be used rather than availing expensive loans. One is eligible to withdraw from the 7th year onwards and the maximum amount cannot exceed more than 50% of the balance in the PPF account at the end of the 4th year or immediate preceding year whichever is lower.
Loan against PPF:
In case you are not eligible for partial withdrawal from your PPF account, you can always avail loan against PPF to use in case of financial emergencies. Loans from PPF also have certain specific conditions. Loans on PPF accounts are eligible only for accounts between the 3rd financial years to the 6th financial year. A second loan is allowed as long as the basic criteria of having PPF account between 3rd and 6th financial year is upheld and all previous loans and dues are repaid successfully. Inactive or discontinued accounts or dormant accounts are not eligible for loans.
Amount of Loan and Interest Rate:
The maximum amount of loan taken from a PFF account is fixed at 25% of the balance lying in one’s account at the end of the first financial year. For example if one applies for a loan in the 4th financial year, the balance at the end of the 2nd year would be taken into consideration while for someone applying in the 5th financial year, the balance in the 3rd financial year would be considered. The interest rate on the loan amount is 2% higher than the interest being given on the PPF balance. For people getting 8.8% interest on their PPF account, the interest charged on the loan would be 10.8%. Considering the fact that the charged interest rate is far lower than any other loan instrument available in the market, PPF loan offers a wonderful way to offset any immediate financial emergencies and monetary crisis.
Repayment Tenure and Loan Application Process:
Repayment tenure for all PPF loans is fixed at a maximum of 36 months and all loans must be repaid within the stipulated period. Principal amount and interest amount can be paid separately for the convenience of the investor. In case the individual fails to repay the loan in the stipulated time period, the interest rate charged is increased from 2% to 6%. The loan application for PPF loan must be submitted to the designated bank manager or post master in case PPF account is held in the Post office. The application must include the loan amount and the time for which the loan is being requested. PPF account passbook needs to be enclosed with the PPF loan application.