EPF advance vs short-term personal loan

Read on to know more about EPF advances, short-term personal loans and the factors that set the two apart.
EPF advance vs short-term personal loan
5 min read
21 Mar 2023

The pandemic has fundamentally changed our financial ideologies and has left an impact, which is still affecting our society. This outbreak has had a tremendous impact on the common man and the need for access to instant funds has become extremely important. Fortunately, both financial institutions and the government have come up with initiatives and other means of financial assistance. Two of the many financial services offered are EPF advances and short-term personal loans.

Let us look at what an EPF advance, and a short-term personal loan are and what are the key distinctions between them.

What is an EPF advance?

EPF stands for employee provident fund. The goal of the EPF is to help employees save money for their retirement by setting aside a small portion of their salaries each month. Workers in the public and private sectors are both eligible to receive these benefits.

Withdrawing from a EPF account has been a long and time-consuming process in the past. The government of India has, however, taken steps to make it much easier to withdraw funds from EPF accounts. According to the new rules, EPFO subscribers will be able to use the non-refundable EPF advance facility and take out up to three months' basic salary plus dearness allowance (DA) or 75% of their accumulated corpus , whichever is lower.

What is a short-term personal loan?

Loans that can be repaid in a matter of 1-2 years are referred to as short-term personal loans. These loans are unsecured and hence do not require any collateral. After the loan is approved, these funds are instantly credited to your bank account. Quick repayment of funds is the reason that these loans are termed "short-term loans”.

An applicant must meet eligibility requirements set by the lender to avail of a short-term personal loan.

EPF advance vs short-term personal loans

● Loan amount:

The maximum loan amount that can be borrowed through an EPF advance can be lower than a short-term personal loan. An EPF advance amount is based on the employee's EPF balance . Moreover, you can only withdraw from your EPF account for specific reasons like a wedding or higher education.

In comparison to EPF, loan amount for a short-term personal loan is likely to be higher and is completely based on factors including the borrower's income, credit score, and repayment capacity. Moreover, there’s no restriction on the use of funds borrowed.

● Repayment tenure:

An EPF advance is essentially a withdrawal from your existing contribution and hence, it does not have any repayment tenure as such. However, given the compounding nature of the program, it does have an adverse impact on your long-term savings and the amount you would get at the time of retirement.

In contrast, the payback duration for a short-term personal loan is selected by the borrower within a predetermined tenure that often ranges between a few months to three years.

● Eligibility requirements:

EPF advance and short-term personal loan eligibility requirements are very different from one another. To qualify for an EPF advance, an individual must have an active EPF account and have contributed to the plan for a specified number of years. The maximum amount that an individual can withdraw is equivalent to three months of their basic pay and dearness allowance (DA), or the 75% of their EPF share and interest, whichever is lower.

In contrast, to qualify for a short-term personal loan, a borrower must have a good credit score, a reliable income source, and meet other eligibility requirements set by the lending institute. The amount an individual can borrow relies on their creditworthiness and their capacity to repay the loan within the designated time limit.

● Interest rates:

In terms of interest rates, the primary distinction between EPF advance and short-term personal loans is that EPF advance has no interest rate, whereas personal loans have fluctuating interest rates which vary from lender to lender.

The annual interest an EPF member can earn by maintaining an EPF account is 8.5%. Losing on the interest gain of the amount withdrawn is the overall cost of borrowing from an EPF account. It must be noted that the cost of borrowing in this case can be substantially higher considering the compounding nature of interest earned in EPF.

In contrast, borrowers have to pay a certain rate of interest on short-term personal loans. These rates can range between 11% to 30% per annum.

Given that most individuals may not like to compromise on their retirement funds a short term personal loan may be a safer bet than withdrawing from your EPF account.

Bajaj Finserv Personal Loans could be an excellent option if you are looking for funds during a financial emergency. Get a loan of up to Rs. 40 lakh with minimal paperwork and rapid disbursement of funds. You can also take advantage of flexible terms ranging from 6 months to 96 months. Customers can also make use of the personal loan EMI calculator to calculate your monthly payments in a stress-free manner.

Click here to apply for a personal loan today.


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