Never really thought about this option? Well it is the fact. If your Public Provident Fund (PPF) has completed 1 whole financial year, then most probably you will be entitled to get a loan against it. But first, there are certain conditions that you need to comply to.
Firstly, your account needs to have completed one fiscal year from the time your account has been activated. For example, your initial subscription in your PPF account, started in November 2011 (in the fiscal year 2011-12), you can avail a loan only after March 2013 and before March 2017. You cannot apply for a loan once the five fiscal years have ended.
Secondly, you can avail only up to a maximum of 25% as a loan amount on the balance of your account at the end of the second year starting immediately from the preceding year in which the loan is applied for. For example, For instance, if you apply for a loan in November 2011, you would get 25% of the amount that existed at the end of March 2010. If you apply for the loan in the third fiscal year, you can avail a maximum of 25% of the balance available at the end of the first fiscal year. If you opt for a loan in the fourth year, the balance at the end of the second fiscal year would be considered.
Thirdly, interest rate. The interest amount charged against your loan will be just 1% more than what you receive on your PPF. So, if you receive 8% on your PPF, you will need to pay an interest of 9% on the loan that you availed against your PPF. The rates of the PPF are to be revised to 8.6% for the current fiscal, as per the recent decision made by the government. The loan rate to 2% above the rate you receive on PPF is also one of the decisions made by the government pertaining to this fact. So the effective rate for the loan would go up to 10.6%. But, the effective interest remains 1% at present and will remain 2% in the future.
Fourthly, repayment tenor. Once you sign up for the loan, you need repay the principle amount within 36 months. This can be done in 2 ways: 1. You can pay the principle amount in lump sum, 2. You can pay the principle amount in 2 or more installments. However, you must ensure that the monthly installments do not exceed the 36 month period. Once you manage to pay off the principle amount, the next step is to repay the interest. The interest has to be paid in two monthly installments.
The reason why it is mandatory for you to pay off the principle amount within 36 months is because, if you have any amount left as balance, then the interest will be hiked and you will have to pay about 6% more than the rate you receive on your PPF. Also, if you have managed to clear the principle amount and not cleared the interest component, then that amount will be debited from your PPF account.
Loans on PPF, sure has eased your search for cheaper loans as they provide a comparatively lesser rate of interest. Although, this facility comes handy in the light of expensive loans, it can be considered as a risky proposition as you will have to be on the run to accumulate funds to repay both the principle and the interest amount on your loan. Try utilizing this facility with great prudence and only in situations where you are sure that you will be able to accumulate funds within the 36 month deadline.