Before finalising your decision, ensure you thoroughly compare your options across different loan products and lenders and select the one that best meets your requirements and offers the best repayment terms.
Amid the Covid-19 pandemic, many would be looking to take the help of borrowed funds to overcome their liquidity shortages arising out of any loss of income. However, it is important that you select the right borrowing product to best meet your requirements. Now, gold loans and personal loans are two of the most popular instruments that cater to borrowers’ needs. Both the products are different in terms of interest rates, charges, and features. So, how should one decide between the two financing facilities?
To know the answer, let’s find out the features of both the loan instruments.
You need to pledge gold articles like jewellery, coins, bars, etc., with the lender to get a gold loan. So, gold loans are backed by collateral in the form of your pledged gold article. If you fail to repay the loan, the lender could use the pledged gold to recover the loan dues.
Now, a gold loan amount depends on the value of gold you pledge with the lender. Recently, the Reserve Bank of India has permitted lenders to increase the loan to value (LTV) threshold from 70% to 90% of the pledged gold’s value. For example, if the value of your pledged gold is Rs 1 lakh, a lender can now allow you a gold loan up to Rs 90,000 against it.
A gold loan tenure varies from lender to lender and usually ranges between 3 months and 3 years. And the interest on a gold loan depends on the lender, the tenure and the size of the loan, and could be anywhere in the range of 7% to 29% p.a.
To get a gold loan, you need to submit documents like identity proof (PAN, Aadhaar, etc.), address proof (Aadhaar, Voter ID card, etc.) and other documents depending on the lender’s norms. Under a gold loan, you may need to pay processing fees, gold valuation charges, documentation fee, and foreclosure charges depending on your lender. A gold loan can be availed as a term loan or in the form of an overdraft facility, so you get flexibility in terms of repayment choice.
Personal loans are unsecured loan products, i.e., you don’t have to pledge anything to get this loan. However, banks usually check the credit score and history of the loan applicant before sanctioning a loan. The interest rate on personal loans varies from bank to bank. It depends on aspects like the credit score of the borrower, the loan amount, tenure, etc. Broadly, the interest rates range between 8.5% and 25% p.a. while the loan tenure ranges from 1 year to 5 years, varying from lender to lender. The borrower has to repay a personal loan in the form of EMIs.
Most banks also charge processing fees and prepayment and part-prepayment charges on a personal loan. And loan applicants are usually required to submit documents like identity proof, address proof and income proof. Do note the document requirements are likely to be slightly different for salaried and self-employed loan applicants. However, document requirements could be minimal if you’re eligible for a pre-approved personal loan offer. Banks usually ascertain the applicable personal loan amount and interest rate after carefully factoring in the applicant’s income and creditworthiness.
So, which loan product suits you more?
Your decision could be based on the following parameters:
# Availability of security: If you possess sufficient security, and you want to pledge it to get a loan, a gold loan could be a better option for you in terms of lower interest rates. However, if you don’t possess the security, going for an unsecured financing facility like a personal loan could work better for you.
# Loan requirement: If the value of your security is lesser than your loan requirement, a personal loan could be your go-to option if you’re eligible for the loan amount you seek.
# Credit score: If your credit score is poor, you might not be eligible for a personal loan, and even if you are, your applicable loan interest rate will be much higher than those extended to applicants with stellar credit scores (750-800). In such a scenario, going for a gold loan could be the better option for you, provided you have the necessary collateral.
# Income stability: Getting a personal loan could be tricky if you don’t have a stable source of income. So, a gold loan could work better because credit scores have a lower bearing on such loans.
Before finalising your decision, ensure you thoroughly compare your options across different loan products and lenders and select the one that best meets your requirements and offers the best repayment terms. Also, factor in additional charges like processing fee and foreclosure charges apart from the applicable interest rate in your calculations. Check for any pre-approved personal loan offers with preferential rates and minimal paperwork. You can also explore other secured and unsecured loan options like loan against FDs and eligible securities like shares, mutual funds, bonds, etc., loans against insurance plans, car, property, or overdrafts, credit card-linked pre-approved loans, micro-loans, so on and so forth based on your requirements, eligibility and availability of collateral.
Most importantly, whichever loan product you select, ensure you have a proper repayment plan in place because failing to do so could lead to loss of a precious asset, additional interest penalties, accumulation of debt and a damaged credit score.
(The writer is CEO, BankBazaar.com)