Loan against insurance vs personal loan: Which is better and why?

When you are in urgent need of funds, a personal loan often seems the best option. But the question is, is it affordable?

Personal loans can be expensive, with interest rates often going as high as 15%. But if you have an LIC policy, you may be able to get a loan against it at a much more affordable rate.

Check with your insurer to find out how much loan you are eligible for. If the amount meets your requirement, you may not need to approach a bank at all.

A loan against an insurance policy can be a smarter alternative to high-interest personal loans in many situations.

Personal loan vs loan against insurance

"A loan against insurance is usually better when you already have a life insurance policy with a good cash or surrender value. The interest rate is lower, the paperwork is minimal, and the money you receive is not taxable. However, if you don’t repay the loan and the policy lapses or is surrendered, the unpaid amount may reduce your benefits and can also lead to tax being charged on any gains from the policy," said Abhishek Soni, CEO & Co-founder, Tax2win.

A personal loan can be a straightforward option when you need quick funds without tying up your insurance policy.

"A personal loan works well when you need a large amount, want fixed EMIs, or don’t want to use your insurance policy as security. The interest rate is usually higher, but the tax rules are simple. The loan amount is not taxable, and there is no risk to your insurance policy’s tax benefits. However, unlike home loans or education loans, you generally cannot claim any tax deductions on a standard personal loan," said Soni.

Insurance-backed loans offer equal rates and no CIBIL damage

Understanding the difference between a personal loan and a loan against your insurance policy can help you choose the option that saves you the most money and fits your financial situation best.