What is EPF Loan? EPF Advance Vs Personal Loan

Read on to know more about EPF advances, short-term personal loans and the factors that set the two apart.
What is EPF Loan? EPF Advance Vs 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 a loan on EPF or EPF advance, a short-term personal loan are and what are the key distinctions between them.

What is an EPF advance withdrawal or EPF loan?

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 or EPF loan facility and take out up to three months' basic salary plus dearness allowance (DA) or 75% of their accumulated corpus, whichever is lower.

What are the conditions for taking out EPF advance or the loan against EPF?

To take out an Employee Provident Fund (EPF) advance, certain conditions must be met:

  • The individual must be a registered EPF member with an active account
  • And must have completed a minimum period of service.
  • The advance can be used for specific purposes like medical emergencies, housing, education, or marriage, as outlined by the EPF authorities.

What are the EPF advance or early EPF withdrawal rules?

An employee may perform EPF withdrawal under certain circumstances, such as retirement after reaching the age of 55, unemployment for two consecutive months, permanent migration abroad, or specific financial requirements such as:

  1. In purchasing of a land or a house
  2. Education
  3. Marriage
  4. Illness and Medical Treatment
  5. In case of company lock-out
  6. Retirement
  7. Unemployment

To take out an Employee Provident Fund (EPF) advance, certain conditions must be met. The individual must be a registered EPF member with an active account and must have completed a minimum period of service. The advance can be used for specific purposes like medical emergencies, housing, education, or marriage, as outlined by the EPF authorities.

What circumstances would allow an employee to withdraw their EPF balance?

An employee may perform EPF withdrawal under certain circumstances, such as retirement after reaching the age of 55, unemployment for two consecutive months, permanent migration abroad, or specific financial requirements like purchasing a house, medical emergencies, or higher education for themselves or family members.

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.

What are the conditions for taking out a short-term personal loan?

Obtaining a personal loan necessitates meeting certain conditions. Lenders typically require a good credit score, steady income, and a low debt-to-income ratio. Borrowers must be of legal age and often need to provide identification, proof of income, and other documents. Loan eligibility and terms vary, but meeting these criteria increases the likelihood of approval and favorable loan terms.

EPF Loan vs Personal Loan - Which is better?

  • 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 35% 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.

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.

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Frequently Asked Questions

What is the rule of EPF advance?

EPF advance rules require active EPF membership, completed service duration, and valid reasons like medical expenses, housing, education, or marriage to withdraw funds before retirement.

Should I withdraw my EPF or take a personal loan?

Deciding between withdrawing EPF or taking a personal loan depends on your financial situation. Consider interest rates, repayment terms, and long-term implications before choosing.

What is the drawback of advance EPF withdrawal?

A drawback of advance EPF withdrawal is the reduction of retirement savings, potentially impacting future financial security due to the early withdrawal of funds.

What is the maximum loan from PF?

The maximum loan from PF varies but typically ranges between 50% to 75% of the accumulated balance, subject to certain conditions and regulations.

Can I withdraw 100% of PF?

Generally, you cannot withdraw 100% of your PF. Withdrawal is subject to specific criteria like retirement, unemployment, or financial emergencies.

Who is eligible for a PF advance loan?

Employees meeting certain criteria like service tenure and contributions are eligible for PF advance loans, primarily for purposes like housing, medical expenses, or education.

What is the interest rate of PF loan?

The interest rate on PF loans is subject to regulations and may vary over time. Consult your local Provident Fund office or check official documentation for the current rate.

How can I check my PF loan balance?

You can check your PF loan balance through online portals provided by your PF authority. Alternatively, visit your regional PF office or inquire through your employer's HR department.