It is not uncommon for people to face a short-term financial crunch where they need to arrange a significant amount of funds at short notice.
Delving entirely onto your savings or investments might not be advisable when faced with such a situation. Therefore, one of the best ways to arrange the required fund is to take a loan from a reputed lender.
But what kind of loan should you opt for?
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Personal and gold loans are the two borrowing options you might consider to arrange funds during such a situation.
While both personal and gold loans can be used to meet your financial needs, they differ in many aspects. Evaluating the differences between these two popular loans is essential to make an informed decision.
But which one can be a better option? Let’s find out.
Gold Loan
A gold loan is a secured loan that individuals can borrow from a lender by mortgaging their gold assets. The lender evaluates the value of the mortgaged gold asset and provides loan against that gold. The amount of the gold loan sanctioned is typically a certain percentage of the value of the gold pledged by the borrower.
Once the loan is provided, the borrower starts paying off the loan through regular monthly instalments. Finally, the lender returns the deposited gold to the borrower after the loan is paid off in full.
The gold loan eligibility conditions are hassle-free. An individual can apply for gold loan if the person has sufficient gold assets to deposit as collateral. However, people should check with the lender on more details including the type of gold asset acceptable as collateral.
Personal Loan
A personal loan is an unsecured loan. It doesn’t require the borrower to deposit any collateral against the loan. You can use the personal loan for various purposes like paying for medical treatment, weddings, education etc. Due to their unsecured nature, personal loan amounts can be much lower than gold loans.
But personal loans can be an attractive option to meet sudden financial requirements. You can repay the loan in monthly instalments after meeting your urgent expenses.
Personal Loan Vs Gold Loan
You can better understand the difference between a gold loan and a personal loan after comparing them against the parameters discussed herein.
Interest Rates
Since a gold loan is a secured loan, the gold loan interest rate can be lower than personal loans. However, interest rates can vary on many additional factors. For example, a lender can offer you a significantly lower personal loan interest rate if you have a good credit repayment history.
Additionally, various factors like the borrower’s income, nature of employment, repayment capability, employer’s reputation, debt-to-income ratio, etc., can determine the personal loan interest rate offered by the lender.
While all these factors affect the gold loan interest rate as well, its impact is much lesser. The interest rate depends more on the prevailing gold price, Loan to Value (LTV) ratio etc.
Credit Score
As mentioned earlier, lenders determine personal loan eligibility depending on a good credit score. For instance, a high CIBIL score, preferably 750 or higher, can increase your chances of getting the desired personal loan amount. But a low CIBIL score doesn’t translate to the automatic cancellation of a loan application.
However, the personal loan interest rate can be higher if the lender sanctions a personal loan to the borrower with a low CIBIL score. You can visit the lender’s website to learn more about your personal loan eligibility and ways to improve it.
On the other hand, you may have a slightly better chance of securing a gold loan even with a lower credit score. Moreover, the impact of credit score on the gold loan interest rate is lower.
Loan Tenure
The total time given by the lender to the borrower to repay the loan is known as the loan tenure. A personal loan can have a loan tenure ranging from 1 year to 6 years. On the other hand, gold loans can have a shorter loan repayment period ranging between 7 days to 3 years.
So, you can choose a higher loan repayment tenure with personal loans, which allows you to pay off the loan with a low Equated Monthly Instalment (EMI) amount.
Many reputed lenders provide an online personal loan EMI calculator. You can use this tool to determine how a higher or shorter loan tenure affects the total cost of a loan, considering the personal loan interest rate and the principal amount are the same.
But you can consider taking a gold loan if you’re confident of paying it off quickly within a short period. Besides, you can sometimes get a lower gold loan interest rate, especially if the prevailing market price of gold is high.
Loan Repayment Options
Both personal loans and gold loans have the EMI facility to pay off your loan in a hassle-free way. However, gold loans can be more flexible in providing various types of loan repayment options.
For instance, you can opt for an interest-only repayment where you pay only the interest amount till maturity and pay the principal amount in the end. Alternatively, you can pay the entire interest at the beginning and the principal amount at the end of the loan tenure.
Processing Fee
The lender levies a non-refundable processing fee to process a loan application. The gold loan processing charges are nominal. But personal loan processing fees can be more than 2% of the loan amount with additional GST.
But gold loans can come with various additional charges like administrative costs, gold valuation fees, documentation fees, etc. So, if you add up all these extra charges, then you may find the personal loan processing fees cheaper. Therefore, it is advisable to research well to carefully analyse the personal loan vs gold loan processing fees costs.
Loan Processing Time
Gold loans have a relatively faster loan disbursement rate than other loan options. The lender usually checks the quality of the collateral, finalises the gold loan interest rate, and asks for a simple KYC before approving the loan amount. The approved loan amount is instantly transferred to the borrower’s account. With companies like Tata Capital, the process can be as quick as 30 minutes.
But in the case of a personal loan, the lender first evaluates the loan application based on the personal loan eligibility criteria. The process includes checking the borrower's creditworthiness, payslips, income tax returns, etc. Verifying all the submitted documents can take some time. But, once the verification is complete, the loan is instantly disbursed. However, the process can be much faster if you're pre-approved for a personal loan.
Which One Is Better?
There are no clear winners in the personal loan vs gold loan comparison as each one has its share of pros and cons. Simply put, you can choose a personal loan if you want a long loan repayment tenure with small, easily manageable EMIs.
Alternatively, taking a gold loan can be a better option if you have substantial gold assets lying idle in your home and you are confident of repaying the loan soon.
Ultimately, it must be your call based on your financial condition and loan requirements.
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