Is EPF Advance Better Than A Personal Loan?

Emergencies hit people when least expected. When going through tough times, a personal loan can be the saviour. In fact, personal loans are growing in popularity as they are affordable alternatives to credit cards. Another potential substitute is the EPF advances which now many people are opting for after the government’s decision to relax the withdrawal norms.

Both personal loans and EFP advance can be used to fund education, marriage, medical treatment, home loan repayment, house repair construction, purchase of house, etc. But when in misfortune, which of the two can be economically sound?

EPF Advance

The Employee Provident Fund Organisation allows EPF subscribers to withdraw from their EPF accounts to meet certain financial emergencies. EPF contribute to creation of funds that salaried individuals can use post-retirement. But it can be withdrawn after completing a minimum of 5 years of employment. An important thing to note here is that the amount that is allowed to be withdrawn depends both on the reason as well as the period of service.

As per the new EPF loan rules, all employees who contribute to EPF are only allowed to withdraw the lower of the following amount:

• A maximum of 75% of the accumulated corpus in the PF account.
• The amount equivalent to three month's salary (basic salary plus dearness allowance)

In case of a medical emergency, an individual can withdraw six months' basic salary or the employee's total contributions plus interest, whichever is less.

For the purpose of withdrawal, an employee must have a Universal Account Number (UAN) allotted by the EPFO. The UAN must be linked to the Aadhaar, PAN and bank account. The withdrawal can be made either online or by submitting a hard copy of the application.

EPV Advance Vs Personal Loan

Personal loans are available for a maximum amount of Rs 30 to 40 lakhs, depending on the bank and the applicant’s credit profile. They are easy to qualify and can be availed by any individual between the ages of 21 and 58. They are collateral-free loans and are classified as high-risk loans by lenders. So to get personal loans at favourable terms a borrower must have a good credit history.

Most banks charge 10-18% interest on personal loans. On the contrary EPF loans come without any interest. So when it ultimately comes to savings, EPF Advance has a marginal upper hand over personal loan. Not to mention, withdrawal of EFP is quick.

Personal loans have high-interest rates since they do not involve collateral. But almost all experts advise against withdrawing from EPF account as it somewhat compromises the retirement corpus. EPF account fetches 8.5% interest rate on EPF deposits. So, diluting the retirement funds ultimately diminishes the returns in the long run.

Also, the balance amount becomes taxable if one withdraws before 5 years of their contribution. The funds once withdrawn from the EPF cannot be redeposited affecting finances in the long-run, resulting in dipping of the compounding effect on the total accumulated monetary fund.

Conclusion

When going through a financial crisis, both EPF advance or personal loan may appear convenient, although they may not be the ideal solution. While a personal loan has an extremely high-interest rate, using money from an EPF account lowers the retirement savings.

However, amid a crisis one may have to consider either of the options. It is ideal to weigh all factors and make an informed decision before deciding. Personal loans have a slight leading edge over EPF advances due to their eligibility criteria. But it involves paying a high interest rate on the total loan amount. EPF advance is interest free, though according to the new EPF loan rule tax exemption is allowed only if the employee has a continuous service record for five years.

If you do not wish to touch your EPF savings and decide to go for personal loans, avail one at IIFL Finance. No matter why you need a personal loan, IIFL Finance personal loans are designed to fulfil all your monetary needs easily. The best part is that you can get it instantly through an end-to-end online process.