– By Shaji Varghese

Customer needs are varied and many of them today avail of loans from various financial institutions to meet their requirements. Financial contingencies come unannounced, and the most popular or preferred loans among customers today are gold loans and personal loans. But which one should they go with? It’s not about which is better, but which loan suits their requirements aptly.

  1. Equated Monthly Instalments (EMIs) – Personal loans available today are fixed tenure loans with EMIs (due on a specific date of the month and specific amount). These are suitable for a person with a predictable monthly income. People who earn a daily or variable income should look forward to availing loans where repayment dates are flexible as well as amount as their income is not predictable or fixed. They should choose a loan in which one is allowed to repay as and when they receive the income during the loan tenure.
  2. The most preferred facility that comes with these features is a gold loan which allows flexible dates and amount repayment based on his/her income, along with better repayment facilities.
  3. Tenure – Personal loans have a fixed tenure with monthly debit instructions from the bank account while gold loans have flexible terms to pay well before the contracted terms. Gold loans are offered without a debit instruction from the bank. Many times the customer requirement for a loan is shorter than the tenure of personal loans. Gold loans are available for even 7 days. Hence, tenure requirements should be taken into consideration while choosing between loans.
  4. Prepayment charges – Personal loans being fixed tenure loans with EMI structure do not generally encourage pre-payment of loans.
    There are two scenarios in prepayment:
    (i) Flexibility in part- prepayment where the customer can pay an amount higher than EMI during the loan tenure, allowing the loan to close before the tenure.
    (ii) Customers can pay a lump sum amount and close the loan at any point in time. Both generally come with restrictions by way of prepayment charges in personal loans. But in gold loans, either of these are accepted and customers can make prepayments or close the loan at one go without any prepayment charges, thus reducing the interest outflow for the customer.
  5. Top-up – In a gold loan you can take a top-up loan as and when you want, but in a personal loan, you have to process the loan again which is a tedious process many times. Few financial institutions provide provisions to avail of 24/7 gold loans if there is a headroom available based on the value of the gold given as collateral.
  6. Processing Fee – Personal loans generally have a processing fee across financial institutions as a % of the loan amount but in comparison, the processing fee for gold loans is much lower. For example, at Muthoot FinCorp, the processing fee starts as low as Rs. 20 for gold loans.
  7. Flexibility – Many customers may want the flexibility of bullet loan repayment (one-time repayment of both interest and principal), instead of EMIs which is a feature available in gold loans. While availing personal loans, the EMIs start next month and have a stipulated period and the amount to be paid.
  8. Speed – There is a lot of documentation process while availing a personal loan but taking a gold loan is simpler and quicker comparatively.
  9. Credit Score – Financial institutions consider credit scores as a parameter while approving loans to customers. Rejection rates in personal loans are high due to low credit scores or no credit score. In gold loans, a credit score is not a major vector, and millions of customers who have poor credit histories can strengthen their credit scores by availing of gold loans and repaying them on time.

(Shaji Varghese is the CEO of Muthoot FinCorp Ltd (MFL).)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)