Gold loans and personal loans are two popular options for quick cash. Each option has advantages and disadvantages. Individuals have long relied on gold loans in India to borrow money. On the other hand, personal loans offer unsecured financing based on your creditworthiness. It offers more significant loan amounts and flexibility.
Gold loans usually have lower interest rates and faster processing times. The decision on which option to choose depends on factors such as your debt repayment capacity, immediate requirements, and present financial situation. So, let's find out more about the differences between gold loan vs personal loan in this blog post.
Why Choose Gold Loan over Personal Loan?
A gold loan lets you borrow some of your gold's value using your jewellery or coins as collateral. The loan amount is based on the loan-to-value ratio.
You can repay the loan monthly and retrieve your deposited gold once it is cleared. Your gold secures a gold loan as collateral. Gold loans have no tax benefits unless used for home improvement, residential property construction, purchase, or as a business expense.
Why Should You Choose a Personal Loan?
Applying for a personal loan can be a wise financial decision due to its advantages. Firstly, personal loans provide flexibility in how you utilise the funds. Besides, personal loans do not require collateral. So, it protects your assets in case of repayment challenges.
Personal loans have fixed interest rates and predictable monthly payments. Understandably, timely payments on personal loans can improve your credit score as they are reported to credit bureaus. Personal loans usually have higher borrowing limits than credit cards or other loan types.
The application process for personal loans is typically quick and straightforward. Most banks and NBFCs offer online applications and fast approvals, making personal loans an excellent choice for those who need funds urgently. Additionally, personal loans can be a profitable option compared to high-interest credit card debt. As a result, it saves you money in the long term.
So, the question boils down to this- gold loan or personal loan: which is better? Let's find out in detail in the following section.
Gold Loan vs Personal Loan - A Comprehensive Comparison
The following are the differences between a gold loan and personal loan:
| Features | Personal Loan | Gold Loan |
| Collateral Requirement | No collateral is required; it's an unsecured loan, relying solely on the borrower's creditworthiness. | Requires gold ornaments or coins as collateral. The financial institutions hold the gold until the loan is repaid. |
| Eligibility Criteria | More stringent criteria include a good credit score (usually above 700), stable income, and age range typically between 21 and 60 years. | Less stringent; the primary requirement is owning gold. Most financial institutions require the borrower to be between 18 to 75 years of age. |
| Interest Rates | Generally higher, ranging between 10% to 24% per annum, since the loan is unsecured. | Typically ranges between 7% to 12% per annum, as the loan is secured by gold. |
| Repayment Tenure | They are typically longer, ranging from 1 to 5 years, with some financial institutions offering up to 7 years. | Usually shorter, ranging from a few months up to 3 years. Some financial institutions may offer up to 4 years. |
| Flexibility | The loan amount can be used for various purposes, such as education, travel, medical expenses, etc. | The loan amount can be used for personal or business needs without restrictions. |
| Loan Security | No security is required; the loan is unsecured, making it riskier for the financial institutions. | The gold pledged remains with the financial institutions as security until the full repayment of the loan. |
How to Decide between a Gold Loan and a Personal Loan
Deciding between a gold loan vs personal loan can be a challenge. So, let's find out the parameters to evaluate the right type of loan:
Your Loan Duration
Note that loans against gold ornaments have a short-term tenure of one to three years. On the other hand, personal loans may be taken for one to seven years, depending on the financial institution’s policy.
So, a gold loan is ideal for managing a temporary financial emergency. However, a personal loan is better for borrowing a more significant amount over a slightly longer period.
How Much Do You Want to Borrow
Lenders typically set maximum and minimum borrowing limits for types of loans. The borrowing limit for personal loans can vary. The borrowing limit may vary between financial institutes when it comes to gold loans. Some may offer up to 20 lakhs or more.
So, a personal loan is ideal if you need a loan amount exceeding Rs. 15 lakhs. On the contrary, the gold loan may be considered for smaller amounts.
Rate of Interest
Understandably, a gold loan is secured with your pledged gold. Nonetheless, a personal loan does not require collateral. Therefore, personal loans have slightly higher interest rates compared to gold loans.
Additional Charges
The processing fee for a gold loan could be up to 5% of the loan amount. Additionally, there is a prepayment fee involved if you choose to pay off the loan early. It is important to check the additional charges with your financial institution before opting for any kind of loan.
Eligibility Requirements
The eligibility needs for a gold loan are minimal compared to a personal loan. You only need to be eighteen years old or above and own the gold you want to use as collateral for the loan.
FAQs
1. Which one is better, a gold loan or a personal loan?
The choice depends on your situation. Gold loans often have lower interest rates and faster processing but require gold collateral. Personal loans offer more flexibility but may have higher rates and stricter eligibility criteria.
2. Is it good to take a loan on gold?
A loan against gold can be a good option if you need quick funds at lower interest rates. It allows you to utilise the value of your gold without selling it. However, consider the risks and your repayment capacity.
3. Why is gold loan cheaper?
Gold loans are cheaper because they're secured loans. The gold you pledge serves as collateral, reducing the lender's risk. This allows them to offer lower interest rates compared to unsecured loans like personal loans.
4. What are the risks of gold loans?
The primary risks in gold loans include the possibility of losing your gold if you default on repayments. There's also the risk of gold price fluctuations affecting your loan-to-value ratio and potential emotional stress from pledging family heirlooms.
5. Can we get a gold loan without a PAN?
No, a PAN card is typically required for a gold loan to verify identity and comply with regulatory requirements.
6. Should we pay EMI for a gold loan?
Paying EMIs for a gold loan can be a good option if you prefer smaller, regular payments. It helps manage your cash flow better. However, some lenders offer bullet repayment options where you repay the entire amount at the end of the term.
