Investing in a chit fund and applying for a personal loan are a few options financial institutions offer to help you manage financial needs. However, before choosing an ideal option, you need to understand their meaning, differences and benefits.
While a chit fund is an informal option for borrowing and saving money, a personal loan enables easy access to funds. You can repay the borrowed amount in regular instalments.
Read on to know the meaning of chit fund and personal loan, their differences and more.
A chit fund is a primarily South Asian scheme of investment, which works as a savings and credit product. With this credit option, many individuals pool funds at regular intervals, which a chit fund company moderates. Individuals who cannot access loans and other credit options benefit from this facility.
A personal loan is an unsecured form of credit where you can get funds without pledging your valuable assets as collateral. These funds are available without end-use restrictions, but the lender charges an interest on the borrowed amount. Remember, the loan amount, interest rate and other parameters depend on your creditworthiness. So, you must have a good credit score when applying for a personal loan.
When you apply for a personal loan, you get an offer from the lender for the loan amount, applicable interest rate and tenure based on your credit profile. After the loan disbursal, you can repay the outstanding amount in equated monthly instalments (EMI).
Chit fund investments start on a fixed date for a specific number of months equal to the number of members. All members need to contribute an equal amount to the pool. An open auction system helps determine the lowest sum a member plans to take from the accumulated amount.
After an auction or lucky draw, one member gets the decided amount, while the rest gets distributed among the remaining members. The process repeats until all the members have had their turns. During this time, all members continue with contributing instalments every month.
Also Read: Benefits of a Personal Loan
Now that you know what chit funds and personal loans are and how they work, here are a few key differences between them.
The procedure to get the desired amount from chit funds may be more complex than personal loans. There is also no guarantee that you will get the funds as a random order decides which member will get the funds. The repayment amount and duration will also depend on the number of members.
When you opt for a personal loan, you can choose a convenient repayment timeline and calculate your EMIs beforehand. Based on your eligibility, it is easy and quick to get a personal loan online.
The interest rate or cost of capital varies for chit funds, depending on the auction for the month. However, lenders offering personal loans have fixed interest rates that you are well aware of before opting for the same.
Availability of a secure and trusted chit fund can be difficult. Moreover, this credit product is not universally accepted. On the other hand, getting a personal loan from banks or NBFCs is pretty straightforward.
The processing time for chit funds varies up to a month, depending on the last auction. However, you can get instant personal loans online, thanks to fintech advancements. Most lenders offer instant approval and disbursal within 1-2 days.
Financial institutions provide all personal loans according to RBI regulations. So, they are trustworthy sources of getting access to finance. However, many underground chit funds remain unregulated, where the trust factor may be a significant issue. So, checking for registration with the State Governments under the Chit Funds Act of 1982 is mandatory before investing.
When comparing these credit options, consider these differences before deciding on a suitable one. Investing in chit funds has many benefits, but it requires investment beforehand.
However, if you have an urgent financial requirement, opting for a personal loan from Fibe may be a smart approach. With the Fibe Instant Cash Loan, you can get up to ₹5 lakhs at pocket-friendly interest rates.
Moreover, we don’t assess your eligibility based on your credit score. Instead, we use an alternate scoring mechanism for loan approvals. Download the Personal Loan App or register on our website to get started.
Chit funds benefit individuals of lower income brackets to get funds. Individuals who are not eligible to open a bank account can invest in them to protect their financial future.
Choosing the right financial product depends on your requirements and many other factors. Nevertheless, opting for a personal loan at Fibe is easier, faster and more secure.
All chit funds registered with the Registrar of Societies, Chits and Firms and regulated by the Reserve Bank of India under the Chit Fund Act of 1982 are legal.