If you are a member of a provident fund, you may be able to use your retirement savings as collateral for a loan. This can be a convenient and cost-effective way to access finance for various purposes, such as buying a home, paying for education, or covering an emergency expense. However, taking a loan against provident fund also comes with some risks and costs that you need to be aware of. In this blog post, we will explain what a provident fund is, how you can take a loan against it, and what fees are associated with it.
What is a Provident Fund?
A provident fund is a type of retirement fund that allows you to save a portion of your salary every month for your future. Your employer may also contribute to your provident fund, depending on the rules of your fund. The money in your provident fund is invested in various assets, such as stocks, bonds, and property, to grow over time. You can access your provident fund when you retire, resign, or become disabled.
How to Take a Loan Against Provident Fund
According to the Pension Funds Act, you can take a pension-backed home loan against your retirement savings if you want to buy, build, improve, or repair a residential property. A pension-backed home loan is a type of secured loan that uses your pension fund as security for the loan. This means that if you default on your loan repayments, the lender can claim the money from your pension fund.
There are two ways to take a loan against provident fund:
Loan Directly from Your Fund
Some pension funds allow their members to take out loans directly from the fund administrators. This option may be cheaper and faster than borrowing from a bank or a private lender, as the fund may charge lower interest rates and fees. However, not all funds offer this option, and there may be some limitations and conditions on the amount, term, and purpose of the loan. You will need to check the rules of your fund and apply for the loan through the fund administrators.
Borrow from a Bank or Private Lender
Another option is to apply for a loan from a bank or a private lender where your pension fund is used as security for the loan. This option may give you more access to finance and flexibility, as you can choose the lender, the amount, the term, and the purpose of the loan. You may also be able to negotiate a lower interest rate and save on costs, as the lender will have less risk. However, you will need to get approval from both the lender and the fund trustees, and you may have to pay some fees and charges to the lender and the fund.
Fees Associated with Borrowing Against Your Provident Fund
Taking a loan against provident fund is not free, and you will have to pay some fees and costs to the lender and the fund. These may include:
Pension-Backed Home Loan Costs
If you take a pension-backed home loan, you will have to pay the following costs to the lender:
APR: This is the annual percentage rate that reflects the total cost of the loan, including interest and fees. The APR may vary depending on the lender, the amount, the term, and your credit profile. You can compare different lenders based on their APRs to find the best deal.
Initiation fee: This is a once-off fee that the lender charges to set up the loan. The initiation fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the National Credit Act.
Monthly service fee: This is a monthly fee that the lender charges to maintain the loan account. The monthly service fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the National Credit Act.
Handling fee: This is a fee that the lender charges to handle the payments from your pension fund to the loan account. The handling fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the Pension Funds Act.
See also: Loan against my car
Bridging Loan Costs
If you take a bridging loan, which is a short-term loan that you can use for any purpose, you will have to pay the following costs to the lender:
APR: This is the annual percentage rate that reflects the total cost of the loan, including interest and fees. The APR may be higher than a pension-backed home loan, as bridging loans are riskier and have shorter terms. You can compare different lenders based on their APRs to find the best deal.
Initiation fee: This is a once-off fee that the lender charges to set up the loan. The initiation fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the National Credit Act.
Monthly service fee: This is a monthly fee that the lender charges to maintain the loan account. The monthly service fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the National Credit Act.
Handling fee: This is a fee that the lender charges to handle the payments from your pension fund to the loan account. The handling fee may be a fixed amount or a percentage of the loan amount, subject to a maximum limit set by the Pension Funds Act.
Conclusion
Taking a loan against provident fund can be a convenient and cost-effective way to access finance for various purposes, such as buying a home, paying for education, or covering an emergency expense.
However, you need to be aware of the benefits and risks of this option, and compare the different ways to take a loan against provident fund.
You also need to consider the fees and costs involved in taking a loan against provident fund, and how they will affect your retirement savings and your monthly budget. Before you decide to take a loan against provident fund, you should consult a financial adviser and a legal adviser to help you make an informed decision.
