Need emergency cash? Your PPF may offer a cheaper way to borrow

An unexpected medical bill, urgent home repair or another large expense can leave you looking for money at short notice. A personal loan may be the obvious answer, but if you have a PPF account, there is another option worth checking. PPF rules allow an account holder to take a loan against the balance during a limited period. The facility is not available throughout the 15-year PPF tenure, and there is also a cap on how much can be borrowed. For someone who needs a relatively small amount for a short period, the PPF loan can be useful because the account itself does not have to be closed or broken. The loan is available only for a few years You cannot take a loan against PPF whenever you want. The facility is available from the third financial year after the account is opened until the end of the sixth financial year. The amount is also restricted. You can borrow up to 25 percent of the eligible PPF balance, based on the balance at the end of the second financial year immediately before the year in which the loan is applied for. So, a large PPF balance does not automatically mean you can borrow a large amount. The interest cost can be relatively low One reason to consider a PPF loan is the interest rate. Under the current rules, interest on the PPF loan is charged at one percent a year on the principal. The PPF itself continues to earn interest according to the applicable government-declared rate. For comparison, a personal loan generally carries a much higher rate, although the actual rate depends on the lender, borrower and loan terms. So, if you are eligible for a PPF loan and need money for a short period, the borrowing cost can be considerably lower. But the loan is not interest-free. The interest is payable after the principal has been repaid, and the rules allow repayment of the principal over a maximum period of 36 months. The interest has to be paid within two monthly instalments after the principal is cleared. Do not borrow more than you can repay Suppose you need Rs. 1 lakh for an emergency and are eligible to borrow that amount from your PPF. At an illustrative one percent annual loan rate, the interest cost would be far lower than what you could face on a typical unsecured personal loan. The actual amount of interest will depend on how and when you repay the loan. Also remember that the borrowing limit is linked to an earlier PPF balance. Someone who has recently started the account may have a relatively small eligible loan amount even if the current balance has grown. Check the withdrawal option too A PPF loan is not the only way to access money from the account. Partial withdrawals are permitted under separate rules from the seventh financial year after opening the account. Once eligible for withdrawal, an account holder may find that taking out money is more appropriate than taking a loan, particularly if repayment would put pressure on the monthly budget. For an emergency, first work out how much you actually need and how quickly you can repay it. If the amount is within the PPF loan limit and you expect to clear it comfortably, the facility can be a useful alternative to more expensive borrowing. If the requirement is much larger or repayment is uncertain, using PPF simply because it is available may not be the right move. The main advantage of a PPF loan is that it gives you access to cash without ending the long-term investment. But the limited borrowing window, loan cap and repayment rules mean it works best as a short-term solution, not as a regular source of funds. Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.