One of the basics of financial planning is the concept of an emergency fund whereby you accumulate three to six months of expenses in easily accessible liquid form, be it a Fixed Deposit or balance in your bank. What if you do not have an emergency fund and are in need of funds urgently? For an emergency borrowing, what is a better option — Chit fund or Personal Loan?
What is a Chit Fund?
Chit Fund is a uniquely Indian informal system of saving and borrowing. Most popular in Kerala, where it is often referred to as chitty, first instance of this concept has also been noted in the state in the 19thcentury.
Wikipedia defines the current concept of chit funds as:
The fund starts at an announced date and continues for the number of months equal to the number of subscribers. Each month, the subscribers put in their monthly instalments into the pot. Then, an open auction is conducted to determine the lowest sum a subscriber is willing to take that month (whereas the surplus is distributed among the rest of the subscribers). The process repeats, distributing the auction amount to one member each month. All of the other subscribers, including the ones who took their share in a previous month, continue paying the monthly instalments.
Personal Loans on the other hand are a widely known fairly simple product.
Read more on Personal Loans here.
How do you choose between a chit fund and a personal loan? There are enough debates on the matterbut below are the five parameters that you must consider:
1. Complexity
As you can see from the above definition, chit funds are a fairly complex product. Also, every month you are in competition with the rest of the members for the “chitty”. Unlike a personal loan which comes with a fixed predictable repayment period, the repayment period and amount depend on the number of members in the chit fund.
2. Interest rate
Interest rate or the cost of capital can be variable depending on the price at which the chitty or the chit fund is auctioned in the month that you need it. With personal loans, you know exactly what you are getting into with the rates known up front. Also, personal loans turn out to be cheaper with a wide range of rates starting from 11% going up till 24%.
3. Accessibility
Chit funds are a closed user group activity and everyone does not have access to it. Neither are they very open or universally accepting. Personal loan on the other hand is available not just from banks but other NBFCs including Money View. This wide scale accessibility makes personal loans an easier bet in case of need, rather than chit funds.
4. Processing Time
The processing time for a chit fund can vary and even go up to a month if the previous auction has just taken place. On the other hand, today there are a lot of brands that provide very quick disbursement of a Personal Loan directly into your account. In fact, Money View can give you a loan offer within 2 minutes and disburse it within a few hours!
5. Trust factors or security
The biggest concern with chit funds, apart from all the above mentioned reasons though, is the aspect of security. While Chit Funds are supposed to be registered and regulated by the respective State Governments under the Chit Funds Act, 1982 there are a lot of unregulated funds that carry out the activity underground. Just type the words “chit fund scam” and you will be greeted with a host of examples, the latest being a chit fund scam in Kolkata discovered just last month.
Personal Loans can be handy in a number of cases, be it as working capital for a small business or even to pay off extremely high interest credit card debt. Money View offers Personal Loans online that can be disbursed in a few hours itself.
This article was originally published on Money View Blog.
