Borrowing may look like an easy task but making the right decision based on the options available is crucial when you have a specific financial need. With numerous lending options available in the market, selecting the right one can be overwhelming.
If you need a small amount of quick cash, two popular choices are gold loans and personal loans. Each has its own advantages and drawbacks, depending on factors like interest rates, processing time, and repayment terms. Let’s compare both to help you make an informed decision.
What is a Gold Loan?
A gold loan is a secured loan where you pledge your gold jewellery, coins, or ornaments as collateral. The lender evaluates the gold’s purity and weight, then offers a loan based on a percentage of its current market value. Most banks and NBFCs (Non-Banking Financial Companies) offer gold loans at a loan-to-value (LTV) ratio of up to 75% as per RBI guidelines.
Adhil Shetty, CEO of Bankbazaar.com, says, “Gold loans are popular because they are processed quickly, require minimal documentation, and don’t depend on your credit score. If you fail to repay, the lender has the right to auction the gold to recover the loan amount.”
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What is a Personal Loan?
A personal loan is an unsecured loan, meaning you don’t need to provide any collateral. Lenders assess your credit score, income, job stability, and repayment capacity before approving the loan. Personal loans are usually available for amounts between Rs 10,000 and Rs 40 lakh. Since they are unsecured, interest rates are higher compared to secured loans. The approval process can take longer because lenders evaluate your financial background thoroughly.
Interest Rates and Charges
Gold loans come with lower interest rates than those of personal loans since they are secured. Interest rates for gold loans range between 7% and 15% per annum, depending on the lender and gold quality. Some lenders charge minimal or no processing fees. Personal loans, being unsecured, attract higher interest rates, usually between 10% and 24% per annum. Processing fees for personal loans are also higher, often between 1% and 3% of the loan amount. Therefore, gold loans are more affordable when you need a smaller loan for a short duration.
Loan Amount and Tenure
Gold loan amounts depend on the gold’s value, typically between Rs 1,000 and Rs 1 crore. The tenure for gold loans is shorter, ranging from 3 months to 36 months. Lenders usually allow flexible repayment options, including interest-only payments during the tenure. Personal loans, on the other hand, depend on the borrower’s credit profile and repayment capacity. Personal loan amounts range from Rs 10,000 to Rs 40 lakh, with tenures between 12 months and 60 months. Gold loans are better suited for short-term needs, while personal loans are more appropriate for long-term financial needs.
Approval and Disbursement Time
Gold loans have a faster approval process since they are secured. Lenders only need to assess the gold’s value and verify basic KYC (Know Your Customer) documents. Most gold loans are approved and disbursed within a few hours, sometimes even within 30 minutes. Personal loans take longer to process since lenders evaluate the borrower’s credit score, income, employment details and financial history. Therefore, if you need urgent funds, a gold loan is a quicker solution.
Repayment Flexibility
Gold loans offer flexible repayment options. You can choose to pay only the interest during the loan tenure and settle the principal at the end. Some lenders allow bullet payments or partial prepayments without penalties. Personal loans come with fixed EMIs that include both principal and interest. Missing an EMI can affect your credit score and result in penalties. Prepayment charges on personal loans can be high, especially during the initial repayment period.
Risk Factor
Gold loans come with the risk of losing your gold if you fail to repay the loan. Lenders have the right to auction the gold if the loan is not settled within the agreed period. However, since gold prices tend to be stable or are rising, this risk is relatively low. Personal loans carry no asset loss risk since they are unsecured.
Which One Should You Choose?
If you need a small loan for a short period, a gold loan is often the better option. It offers quick disbursement, lower interest rates, and flexible repayment options. You don’t need a high credit score or proof of income. On the other hand, if you don’t have gold to pledge or prefer a longer repayment period, a personal loan may be suitable.
Both options come with their own pros and cons. You may decide based on your requirements of funds and how quickly you need it. Don’t forget to compare the interest rates and other terms and conditions.
