Planning on a big-ticket spend but don’t have the money to bankroll it all? Or facing a family emergency and your savings are insufficient to bail you out?
A fair few of us who have been in suchsituations feel that the most feasible option is usually a loan — that too a personal loan owing to its formal and collateral-free nature.
Gold loans are becoming a viable alternative to quickly raise funds for many. With banks and non banking financial companies replacing pawnbrokers to introduce more regulated and streamlined processes, your idle jewellery and gold coins could be of immense help.
Gold financiers offering formal repayment terms and fixed interest rates. However, gold loans are still issued against a security – typically physical jewellery but also coins, biscuits, bars etc. which are returned following the complete repayment of the principal and interest.
Advantages of gold loan
Prompt issuance: Gold loans are a quick way to access credit. In most instances, you merely have to take your gold to the gold financier, which would be verified and authenticated. A few forms to be filled along with KYC documents and you can walk out with the funds in a few hours. This is applicable to both gold financiers as well as banks.
Less reliance on credit score: One of the biggest sticking points when it comes to most forms of credit is your credit score. In the case of gold loans, while your score is taken into account, it is the yellow metal that determines your loan eligibility. This makes it easier for potential borrowers with low scores to gain access to formal credit lines.
Lower interest: Since gold loans require collateral, they are considered secured loans. The bank/lender takes physical ownership of your gold until such time as the entire amount is repaid. Being a secured loan, the interest rate payable is relatively lower than other unsecured loans.
Flexibility: Most lenders also offer flexible repayment tenures for such loans, though this can be a double-edged sword. You might be paying a low interest but over a longer tenure, it could result in you paying a higher amount towards interest compared to a conventional loan. So, due diligence is a must.
However, before you dig up your gold as collateral for a loan, consider some potential pitfalls too, apart from the obvious fact that you need to have gold in order to get a loan against it.
Purity: Only pure gold (18 carats and above) is accepted by most lenders, with many preferring gold without adornments (such as gemstones) as collateral. Plated jewellery and oxidised jewellery is also a no-no for some lenders, thereby reducing the amount of collateral you can pledge.
Gold price: Fluctuations in gold prices could affect the loan to value ratio (LTV), which is the ratio on which such loans are disbursed. Gold loans are issued against the existing gold market price and interest is calculated based on the loan tenure. A drop in gold rates could result in interest rates being revised or the lender requesting more gold as collateral to maintain the LTV.
Don’t want to deal with fluctuating rates and monitoring bullion markets? Consider a personal loan to meet those expenses quickly and relatively hassle-free.
Advantages of personal loan
Quick disbursal: With their speedy disbursal and streamlined application procedure, personal loans require minimal documentation (well, more so for salaried individuals) and you can have the money in your account within as little as 24 hours.
No collateral: These loans do not require any collateral, making it an attractive option if you don’t have assets like gold, shares etc.
Tenure: Personal loan tenures are relatively short, which explains them not requiring collateral. The fixed tenures also instil a sense of discipline since you are obligated to make fixed payments regularly. This ensures your loan is paid off sooner, compared to a gold loan which usually has flexible payment options. You can also pre-close a personal loan after paying pre-closure charges post the mandatory lock-in period, which is usually 12 months.
Credit score plays an important role: Don’t have a good credit score? Well, an interest rate that’s a notch higher is your best bet then, if outright rejection is your worst. However, lenders do consider other parameters like financial stability to evaluate a loan applicant’s creditworthiness even when his/her credit score is low.
So, carefully evaluate the pluses and minuses attached to gold loans and personal loans, and the contours of your situation, before taking the plunge.
The writer is CEO, Bankbazaar.com