LIC Policy Loan vs Personal Loan: Is Borrowing Against Your Policy Really Cheaper — and When Does It Backfire?
LIC Policy Loan vs Personal Loan: Is Borrowing Against Your Policy Really Cheaper — and When Does It Backfire?
If you hold a traditional LIC endowment or money-back policy, you can usually borrow up to 90% of its surrender value without a credit check. It is often cheaper than a personal loan, with two catches most borrowers miss.
A medical bill, a child’s admission fee, a short-term business gap: you need ₹2 lakh within a week. Your banking app shows a pre-approved personal loan at 14% with a processing fee. Then a relative reminds you of the LIC endowment policy you have paid into for nine years and says you can borrow against it for less. Both are true. But an LIC policy loan is not a free withdrawal from your own savings. It is a loan with its own interest, it compounds every six months, and if you treat it as money you never have to repay, it can quietly eat the very policy that secures it.
How an LIC loan actually works
A policy loan uses your policy’s surrender value as security. Finnable’s guide, updated in June 2026, says LIC charges a fixed 9% to 10% a year, with older policies sold before 2010 generally at the lower end and newer plans nearer 10%. Interest is charged every six months, and you can pay just the interest and defer the principal. Angel One describes a broader range of 9% to 11%.
- 90% / 85%Loan limit as a share of surrender value: in-force and paid-up policies
- Half-yearlyInterest compounding period on LIC policy loans
- ₹0Processing fee and prepayment penalty, per Finnable
- 15 to 20 minTime to apply through LIC’s online e-services
- 3 to 5 daysWorking days to receive funds after an online application
- No CIBIL checkNo income documents or credit score needed
Only participating endowment, whole life and money-back plans qualify. Term insurance has no surrender value, so it cannot be used. Finnable gives a Jeevan Anand example: 14 years of ₹30,000 premiums building a surrender value of about ₹4.2 lakh, against which about ₹3.78 lakh could be borrowed.
The rate gap, bank by bank
Personal loan advertisements quote the lowest rate, which goes to a narrow band of borrowers. The upper end of the range is what many applicants are actually offered. BankBazaar’s 2026 rate table shows how wide the spread is.
% a year. Bank ranges from BankBazaar’s 2026 personal loan rate table. LIC figure is 9.5% compounded half-yearly, an effective 9.73% a year, our calculation.
A few banks advertise starting rates at or below LIC’s, such as 8.75% at Axis Bank and 9.99% at HDFC, ICICI and IDFC First Bank. If you qualify for those, the gap narrows sharply, though processing fees of up to 2% or more still tilt the cost.
Credit history matters here too. Because an LIC policy loan needs no credit check or income documents, it is often the only low-cost option for self-employed people with irregular income, retirees, or anyone whose credit score has slipped. A personal loan application, by contrast, adds a hard enquiry to the credit report, and a rejection can make the next application harder.
₹2 lakh, three years: the side-by-side
To compare fairly, assume you repay the same ₹2 lakh over 36 months in both cases. For the LIC loan we use 9.5% compounded half-yearly and equal monthly part-payments, which LIC’s flexible repayment allows. Personal loan figures use reducing-balance EMIs.
Our calculations. Personal loan EMIs on reducing balance; 2% processing fee plus 18% GST where stated. LIC loan at 9.5% half-yearly, repaid in equal monthly amounts.
The worked comparison. A 14% personal loan of ₹2 lakh over three years has an EMI of ₹6,836 and total interest of ₹46,079. Add a 2% processing fee with GST and the total cost is ₹50,799, an APR of 15.69%. The LIC loan, repaid in equal monthly amounts of about ₹6,390, costs about ₹30,023 in interest.
That is a saving of about ₹16,056 against the 14% loan before fees, and about ₹20,776 after them, our calculation. The saving disappears only if you qualify for a personal loan near 9% to 10% with a low fee.
The trap: no EMI means no discipline
A personal loan forces repayment: miss an EMI and your credit score suffers. An LIC policy loan has no fixed schedule. You can pay only the interest, or nothing until maturity, when LIC deducts the loan and accumulated interest from the payout. That flexibility is the feature borrowers like most and the one that costs them most.
Our calculation at 9.5% a year compounded half-yearly. Finnable gives similar figures: ₹19,452 interest in year one and about ₹63,700 over three years.
What borrowers get wrong: thinking “it is my own money, so there is no hurry”. Unpaid interest is added to the loan every six months. In ten years, ₹2 lakh becomes about ₹5.06 lakh. Finnable warns that if the debt exceeds the surrender value, LIC can terminate the policy, ending the life cover you have paid for over many years.
Borrowing the maximum leaves almost no headroom
In the Jeevan Anand example, a ₹3.78 lakh loan against a ₹4.2 lakh surrender value leaves headroom of ₹42,000. At 10% a year, unpaid interest on ₹3.78 lakh exceeds that in a little over a year, our calculation, unless the surrender value rises faster through further premiums and bonuses. Borrow well below the limit, and pay at least the interest every six months.
Feature by feature: what each loan really offers
| Feature | LIC policy loan | Bank personal loan | What it means for you |
|---|---|---|---|
| Interest rate | About 9% to 10%, fixed | About 8.75% to 24% | LIC wins unless you get a bank’s best rate |
| Compounding | Half-yearly | Monthly reducing balance | Pay LIC interest on time to avoid compounding |
| Processing fee | None reported | Up to 2% or more, plus GST | Adds 1 to 2 points to a personal loan’s APR |
| Credit check | Not required | Required | LIC loan suits those with weak or thin credit |
| Loan size | Up to 90% of surrender value | Based on income and score | LIC loan is capped by policy value |
| Repayment | Flexible, no EMI | Fixed EMIs | Flexibility can become a debt trap |
| Prepayment | No penalty | Charges common on fixed-rate loans | LIC lets you clear early at no cost |
| Default risk | Policy can be terminated | Credit score damage, recovery | Different consequences, both serious |
| Speed | 3 to 5 working days online | Same day to a few days | Personal loan can be faster if pre-approved |
Three repayment styles, three very different bills
Because LIC does not set an EMI, the cost of the same ₹2 lakh loan depends entirely on how you choose to repay it. Using our 9.5% half-yearly example over three years, the three common approaches look like this.
Style one: steady monthly part-payments
Paying about ₹6,390 a month, much like an EMI, clears the loan in 36 months with total interest of about ₹30,023. This is the cheapest route and the one our comparison uses. It requires the same discipline as a personal loan, but without a lender enforcing it.
Style two: interest only, principal at the end
Paying just the interest every six months, ₹9,500 each time, keeps the debt from growing. After three years you have paid ₹57,000 in interest and still owe the full ₹2 lakh. This suits someone expecting a lump sum, such as a bonus or a maturing deposit, but it costs nearly twice as much as steady repayment over the same period.
Style three: pay nothing until maturity
Letting it run means about ₹64,213 of interest builds up in three years and more than ₹3 lakh in ten. The money comes out of the maturity payout, or out of the family’s claim if the policyholder dies. This is the style that turns a cheap loan into an expensive one, and the one most likely to put the policy itself at risk.
Do not use a policy loan to invest. Borrowing at 9% to 10% to put money into shares, mutual funds or trading is a bet that returns will beat a guaranteed cost, with your life cover as the security. Use the loan for genuine needs and repay it quickly.
When each one makes sense
- Choose the LIC loan whenyou have a traditional policy with a healthy surrender value, need a moderate amount for a short period, can repay within one to three years, and either cannot get a cheap personal loan or want to avoid a hard credit enquiry.
- Choose a personal loan, or neither, whenyour policy’s surrender value is small, you need more than it can support, you qualify for a bank loan near 9% to 10% with a low fee, or you know you will struggle to repay without the discipline of a fixed EMI.
Look at other secured options too. A loan against a fixed deposit or a gold loan is also usually cheaper than an unsecured personal loan. And if the money is for spending you could postpone, the cheapest loan is still the one you do not take.
Applying online, step by step
Finnable describes LIC’s online route through its e-services portal as taking 15 to 20 minutes, with funds typically arriving in 3 to 5 working days. Branch applications need the original policy bond, ID, address proof, a cancelled cheque and Form 5144.
- Step 1Log inLIC e-services portal with registered policy.
- Step 2Policy loanChoose the policy; eligible amount appears.
- Step 3Pick amountBorrow well below the 90% limit.
- Step 4Bank detailsConfirm the account for credit.
- 3 to 5 daysReceive fundsTypical online processing time.
The life of a policy loan, from eligibility to settlement
- Pay premiums; no loan allowed until 3 full years are paid.
- Borrow up to 90% of surrender value if in force.
- Interest falls due; unpaid interest is added to the loan.
- Repay part or all of the principal with no penalty.
- Outstanding loan and interest are deducted from the payout.
If the policyholder dies with a loan outstanding, the nominee receives the death benefit minus the loan and accrued interest. A family relying on the full sum assured should know that a large unpaid loan reduces it.
A pre-borrowing checklist
- Policy has at least 3 full years of premiums paid
- Check the surrender value and eligible amount online
- Borrow 50% to 70% of the limit, not the full 90%
- Confirm the exact rate, between 9% and 11%, for your plan
- Set a reminder for interest every 6 months
- Plan to repay principal within 1 to 3 years
- Compare with a personal loan’s APR, not its headline rate
- Keep paying premiums so the policy stays in force
- Tell your nominee that a loan reduces the payout
- Check FD or gold loan rates as alternatives
Questions borrowers ask about LIC policy loans
What is the interest rate on an LIC policy loan?
Reported rates are about 9% to 10% a year, fixed, with some sources citing up to 11%. Older policies tend to carry lower rates. Interest compounds every six months.
How much loan can I get on my LIC policy?
Up to 90% of the surrender value for in-force policies and up to 85% for paid-up policies, after at least three years of premiums.
Is an LIC loan cheaper than a personal loan?
Usually. On ₹2 lakh over three years, an LIC loan at 9.5% costs about ₹30,000 in interest, against ₹46,079 for a 14% personal loan before fees, our calculation.
Can I take a loan on an LIC term insurance policy?
No. Term plans have no surrender value, so they cannot be used as security for a policy loan.
What happens if I do not repay my LIC loan?
Interest is added every six months. The outstanding amount is deducted from the maturity or death benefit, and if it exceeds the surrender value, LIC can terminate the policy.
Does an LIC policy loan affect my CIBIL score?
Reports say no credit check is needed to take the loan. The main consequence of non-payment falls on the policy itself rather than a credit report.
How long does an LIC loan take?
Online applications take about 15 to 20 minutes, with funds usually in 3 to 5 working days. Branch disbursal can take 7 to 10 working days.
Can I repay an LIC policy loan early?
Yes. You can repay part or all of it at any time without a prepayment penalty, according to Finnable’s review.
The short version for a busy reader
An LIC policy loan usually beats a personal loan on cost: about 9% to 10% a year, no processing fee, no credit check and no prepayment penalty. On ₹2 lakh over three years it can save about ₹16,000 to ₹21,000 compared with a 14% personal loan. But it compounds half-yearly and has no EMI, so unpaid interest snowballs and can cost you the policy. Borrow below the limit, pay interest every six months and repay within a few years.
