Which is better – A Personal Loan or A Chitty?

personal loan vs chit fund

Generally, you find Indians are good at investing money in various instruments. They understand the risks of concentrating all their investments in a single place. So, chit funds or Chitty also rank high on the list of investment options for Indians. The Chitty has a special place in our hearts because it is an indigenous investment instrument that has survived the rise and fall of various kingdoms and governing dispositions. It has held on to its importance for over a thousand years.

On the other hand, bank loans are a recent phenomenon, especially in the personal loan sphere. The organized P2P lending platform is a relatively new entrant to the personal loan financing scene in India. Under such circumstances, there will always be questions like ‘Which is better – a personal loan or a Chitty.’

Let’s discuss the merits and demerits of a personal loan versus the Chitty without going into the nitty-gritty of what a Chitty is.

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Availability

Personal loans seem attractive as long as they are offered to the borrower. However, the problems start the moment you apply for a personal loan. First, the bank asks you to furnish a long list of documents showing your income and obligations. Then, it seeks answers to hundreds of questions. Besides, the banks refer to CIBIL for your credit report. If your score exceeds 750, you are fortunate enough to get a personal loan. Otherwise, the banks reject the loan application forcing you to approach P2P lending sources, where the interest rate can be astronomical.

In contrast, a Chitty is simple. Once you are a member of the chit fund and contribute to it monthly, you are automatically entitled to bid for the pool money. The chances of bidding right are higher than that of getting a personal loan from the bank. There is no question of determining your eligibility or ascertaining your credit rating. These factors have nothing to do with the Chitty.

Rate of Interest

The rate of interest on a Chitty is variable because it depends on the monthly bid amount. On the other hand, banks’ loan interest rates are between 12% to 15%. They are much higher on the P2P platform at 16% to 25%. Besides, you get an interest on the chit fund deposits even after you have bid for the pooled money. So, the total outflow in a Chitty loan is less than that of a personal loan.

Loan Amount

The personal loan amount depends on your eligibility. You can also be eligible for amounts as high as Rs 10 lakhs or more. On the other hand, the Chitty pool money is not usually that high because the chit fund concept is originally for low-income people. Such people can find it challenging to get a personal loan of Rs 50000 from a bank.

Loan Tenure

The personal loan tenure can be between 12 and 60 months. In the case of P2P lending, the maximum term is 36 months. However, the chitty scenario is different. It depends on the number of members in the fund. Usually, it is around 20. So, if you have taken a loan in the first month, you have to repay the same over the next 19 months.

On the other hand, if you have availed your share of the pooled money in the 10th month, your repayment tenure is ten months. You have already contributed for ten months toward the chit fund. So, a Chitty has a smaller tenure than a bank loan.

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The Primary Difference between a Personal Loan and a Chitty

A personal loan is a money advance you must repay. In contrast, a Chitty is an investment-cum-credit instrument where you pay interest on your withdrawal and get dividends on your deposits.

Which of the two is the better avenue?

It depends a lot on the underlying factors. A personal loan is better if you require a large sum of money. But, if your requirements are small, the Chitty is a better bet. Also, registered chit fund platforms like Money Club offer excellent returns on your investments, making the Chitty a better proposition than a personal loan. Verdict – The Chitty is better from the availability and the interest rate angle. In contrast, the personal loan is a better proposition from the amount and tenure angles.