"Which route to emergency money has the lowest interest?" The answer you hear often is "borrow against your policy." This article examines that claim seriously, comparing the interest with each of the other emergency options — and, more importantly, pointing out that the interest rate alone is not the whole story. (We covered the basic mechanics of policy loans in an earlier article, worth reading alongside this.)
First: where the policy loan rate comes from
The interest rate on a policy loan is stated in the contract or in the company's announcements, generally referenced to the rate used to calculate that plan's premium plus a specified margin. The result is that different policies, from different periods, carry different rates. Some older policies have a very low rate; some newer ones are higher than you would think. So the first answer of this article is: don't take "cheap" on faith. Open the policy or call the company and find out your own actual rate [check the conditions in the policy].
Head to head with each emergency option
A structural comparison (always check the current actual rates [check the latest information]):
- vs credit cards / cash cards: interest in this group sits at the high ceiling set by regulation. A policy loan is usually significantly lower, winning clearly in almost every case.
- vs personal loans: rates here are also high and there are fees. A policy loan is usually still cheaper, with no credit bureau check and no effect on your record.
- vs secured loans (such as refinancing a home): rates here may be similar to or lower than a policy loan, but the process is long and there are hidden costs. For a modest amount of emergency money, the policy is far more convenient.
- vs borrowing from family or friends: the interest may be zero, but the interest charged on the relationship cannot be measured. That is up to each family.
The verdict in this arena: for short-term emergency money, a policy loan is genuinely cheap compared with almost any unsecured lending.
But interest isn't the only cost: three hidden ones to count
First, interest compounding with nobody chasing you. Having no compulsory instalments sounds comfortable, but it means the debt grows quietly if you lack the discipline to repay. Second, the risk of the policy lapsing. When the debt plus interest exceeds the surrender value, all the cover you accumulated disappears. That is the most expensive cost of all, and it appears in no interest rate table. Third, a reduced sum insured. If something happens while the debt is outstanding, the beneficiary receives the amount less the debt — the family may receive far less than you intended.
How to use it so it's "cheap" in both senses
Four rules: use it for necessary short-term matters with a clear repayment plan (waiting for a lump sum already on its way, for instance), not to plug a leak in regular spending; set yourself a repayment schedule as if it were a bank instalment; check the debt against the surrender value every six months; and if you genuinely need to borrow long term, compare it honestly with surrendering or other options, because carrying compound interest for several years can cost more than you think.
In short
Policy loan interest is genuinely cheap compared with unsecured emergency money, but that cheapness comes with conditions: know your own policy's actual rate, repay as planned, and never let the debt grow until it eats the cover. Used well, it is an excellent emergency tool to have at home. Used badly, you lose both the interest and the policy. If you would like to know your own policy's rate and borrowing limit, message us on LINE and we will show you how to check.
This article was inspired by material from the Thai Financial Planners Association (TFPA) and has been entirely rewritten.