The Employees' Provident Fund (EPF) is a retirement savings scheme managed by the Employees' Provident Fund Organisation (EPFO). Under this scheme, both employees and employers contribute 12% of the basic salary plus dearness allowance (cost-of-living adjustment) every month. This accumulated corpus can be withdrawn at retirement.
However, the EPF scheme also allows members to make partial withdrawals from their EPF account balance for specific purposes, such as marriage, education, home loan repayment, etc. This facility of partial withdrawal from one's own EPF contribution is called the EPF advance.
Many people consider taking an EPF advance instead of a personal loan when faced with a financial need. But is EPF advance better than a personal loan? Let's examine in detail:
EPF vs Personal Loan: A Detailed Comparison
Let's compare five different parameters to understand the difference between a personal loan and an EPF advance.
1. Eligibility & Accessibility
Personal Loan:
A personal loan is usually easier to obtain. You only have to qualify for specific criteria like credit score and income level. Notably, there is no restriction on the use of personal loan funds.
EPF Advance:
It is not possible to withdraw EPF Advance freely. Withdrawal is subject to particular conditions like medical emergencies and financial hardships. You can also withdraw your EPF Advance for education and marriage purposes.
2. Interest Rate
Personal Loan:
You usually have to pay high interest rates on personal loans. These rates depend to a large extent on your credit score. Secured personal loans typically have a lower interest rate than unsecured personal loans.
EPF Advance:
The best part of an EPF Advance is that it is interest-free. This is because you are borrowing from your retirement savings. The absence of interest costs makes EPF Advance an affordable option to fund your personal needs.
3. Application Processing
Personal Loan:
Personal loans usually have lower processing time. Depending on your creditworthiness, processing your loan typically takes a maximum of 1 week. Sometimes, it can be more if you don’t meet the eligibility criteria.
EPF Advance:
The request for EPF Advance withdrawal is approved based on your reason for withdrawal. It usually takes some days and even weeks to get approval for your EPF Advance withdrawal. It depends to a great extent on the reason for withdrawal.
4. Credit Score Impact
Personal Loan:
Timely repayment of your loan can positively impact your credit score. All you have to do is pay your EMIs on time. However, missing EMI payments and defaulting on the loan can impact your credit score negatively.
EPF Advance:
EPF Advance is not a loan. Your EPF Advance withdrawal is not recorded in your credit history. Thus, it has no impact on your credit score.
5. Repayment
Personal Loan:
You can repay your loan with Equated Monthly Instalments (EMIs). Notably, failure to pay EMIs can lead to penalties. Your credit score can also be affected adversely.
EPF Advance:
Since you have withdrawn your EPF Advance from your retirement savings, repayment is not required. It can be a less stressful option if you struggle with timely repayments.
When Personal Loan Is a Better Option
A personal loan is a better option over EPF Advance when:
- You do not want to reduce your retirement savings.
- You want the flexibility to use the funds for any purpose.
- You are ready to pay the interest and the EMIs (on time).
- You want to improve your credit score with timely payment of EMIs.
- You need quicker access to funds.
When EPF Advance Is a Better Option
EPF Advance withdrawal is a better option over a personal loan when:
- You can qualify for EPF Advance withdrawal.
- You are looking to avoid debt.
- You are not ready to pay interest.
- You don’t want to impact your credit score.
- There is enough time for you to refinance your retirement savings corpus.
FAQs
1. Should I withdraw my PF or take a personal loan?
Your immediate financial requirements and retirement plans should govern your decision when selecting between them. While PF withdrawal is easier to manage, it can reduce your retirement corpus.
2. Which purpose is best for PF withdrawal?
You get to withdraw your PF for financial hardships and emergencies. You can also withdraw your PF for marriage and education.
3. How is an EPF advance different from a personal loan?
Unlike a personal loan, you are not required to pay EMIs (& interest) for your EPF withdrawal.
4. Can I get a personal loan from EPF?
Withdrawing money from your EPF account is not a loan. EPF Advance and personal loans are separate financial instruments.