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Can I use my PF to clear debt? 55k salary, 8 lakhs loan, 23% & 13% interest

Ramalingam Kalirajan |8292 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Mar 20, 2025

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by manish on Mar 10, 2025Hindi

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Sir i have two personal loan.Emi 18466 & 10359.Total Outstanding is approx 8lakhs.Rate of interest 23% & 13%.My slalry is 55000 per month.Can i use my PF amount to clear my loan.I have 7 lakh in my pf.

Ans: Monthly Salary: Rs. 55,000
Two Personal Loan EMIs: Rs. 18,466 + Rs. 10,359 = Rs. 28,825
Total Outstanding Loan Amount: Approximately Rs. 8 lakhs
Interest Rates: 23% and 13%
Provident Fund (PF) Balance: Rs. 7 lakhs
Key financial concerns:

High-Interest Burden: The 23% loan is significantly costly.
Major EMI Commitment: A large portion of your income goes into EMIs, limiting savings.
PF Withdrawal Dilemma: Using PF can reduce loan burden, but it also affects long-term security.
Should You Use Your PF to Clear Your Loans?
PF is meant for retirement and grows at a stable interest rate. Withdrawing it early should be a last resort. However, in your case, using a portion of it might be beneficial due to the high loan interest.

Pros of Using PF for Loan Repayment
High-interest loans cost more than PF returns:

Your PF earns around 8% interest, but your loan charges 23% interest.
Clearing the high-interest loan with PF saves more money than keeping PF intact.
Reduced EMI burden:

If you pay off a part of the loan, your monthly EMI will decrease.
This will free up cash flow for better financial stability.
Faster debt-free status:

Clearing debt earlier saves money and reduces financial stress.
Cons of Using PF for Loan Repayment
Less retirement savings:

PF is a long-term safety net. Using it now means losing compounding benefits.
No future PF withdrawals for the same purpose:

Once you withdraw, you cannot easily access PF for another emergency.
Tax implications:

If you withdraw PF before 5 years of service, it becomes taxable.
Best Strategy to Manage Your Loans Without Hurting Retirement Savings
Instead of using the entire Rs. 7 lakhs in PF, a structured repayment approach will help optimize both loan repayment and long-term wealth growth.

1. Pay Off the High-Interest Loan First (Debt Avalanche Method)
Your 23% loan is the biggest financial drain.
Use Rs. 4 to 5 lakhs from PF to fully clear or significantly reduce this loan.
Keep the remaining PF intact for retirement security.
2. Consider a Low-Interest Loan for Refinancing
Check if you qualify for a loan against FD, gold loan, or top-up home loan.
If possible, take a lower-interest loan (8-12%) and use it to close the high-interest loan.
This will reduce your EMI burden without touching too much of PF.
3. Keep Some Emergency Funds
Avoid depleting PF completely. Keep at least Rs. 2 to 3 lakhs in PF for emergency needs.
This ensures you have financial security while handling your loans.
4. Gradual Repayment of 13% Loan
Since 13% is a relatively lower interest rate, you can continue paying its EMI.
If you have additional funds in the future, prepay in small amounts.
5. Reduce Financial Stress with a Better EMI Plan
If loan restructuring is possible, request the bank to extend your loan tenure for lower EMIs.
This will ease monthly financial pressure without compromising long-term wealth building.
How to Move Forward?
Withdraw Rs. 4-5 lakhs from PF and clear the 23% interest loan.
Keep Rs. 2-3 lakhs in PF for retirement security.
Continue paying the 13% loan EMI regularly.
Explore options like a gold loan or FD loan for refinancing if needed.
Avoid new debt and focus on improving cash flow.
Final Insights
Using PF partially is the best approach.
Clearing the 23% loan first will save you the most money.
Keeping some PF balance intact ensures retirement security.
Avoid taking new personal loans, and focus on gradual financial recovery.
Once debt is under control, start investing in mutual funds via MFD with CFP credentials for long-term wealth creation.
Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.