The choice between gold loan and personal loan will primarily depend on the borrower’s needs and profile.
By Gaurav Aggarwal
Both gold loans and personal loans do not come with any end usage restriction on loan proceeds. They also have shorter processing time, which makes them a preferred choice for meeting financial shortfalls and emergencies. As a result, those having substantial gold holdings may find it difficult to choose between the two.
Let’s analyse these two loan options to help borrowers to choose between the two:
Applicants of personal loans are required to submit their payslips/ITR forms and various other documents to get their loan application processed. As verification of these documents requires some time, disbursal of personal loans usually take 2-7 days of the loan application. However, some lenders claim to disburse personal loans with faster turnaround time.
Loan amount in case of personal loan ranges from Rs 50,000 and Rs 20 lakh, with some borrowers claiming to sanction a higher loan amount of up to Rs 40 lakh. This usually depends on the loan tenure and borrower’s repayment capacity.
Being a secured loan, the loan amount in case of gold loan primarily depends on the valuation of gold deposited as collateral. However, remember that the RBI has barred lenders from sanctioning gold loans exceeding 75% of the gold’s value.
Interest rate of personal loan ranges from 8.45% to 26% per annum (p.a.). The interest rate on gold loans can range from 7.25% to 29% p.a. basis the loan tenure, LTV ratio and kind of repayment option opted for. Interest rates on gold loans are usually higher for those with long tenure or higher LTV ratios. For those with a good credit profile, the difference in interest rates between gold loan and personal loan may not be much. However, gold loans might prove to be a comparatively cheaper option for those with poor credit profile.
The tenure for personal loans spans from one to five years with a few lenders offering a higher tenure of up to seven years. For gold loans, the tenure is seven days to three years with a few lenders offering tenures of up to five years. As longer loan tenure converts into higher interest cost, opting for a gold loan might be a more cost-effective option for those confident of repaying their loan within one or two years. Personal loan would be a better choice for those seeking a bigger loan amount and longer tenure.
Repayment of personal loans is carried out in the form of EMIs, which involve both interest and principal components. Gold loans, on the other hand, allow various repayment options in addition to the EMI-based repayment structure. For example, while some gold loans allow the borrowers to just service the interest component each month leaving the principal amount to be repaid on maturity date, others allow the option to repay their interest amount upfront during the loan disbursal with principal component to be repaid at the end of the loan tenure. Hence, the non-EMI option of gold loans might suit those facing short-term cash flow mismatches and repayment constraints.
Processing charges for personal loans usually go up to 3% of the loan amount. In case of gold loans, some lenders charge a flat processing fee of as low as Rs 10 while others charge a fee of 0.10% to 2% of the loan amount. So do compare the processing fee of both loan options while choosing between them. Factoring in the processing charges will help you derive the actual cost of availing a loan.
The choice between gold loan and personal loan will primarily depend on the borrower’s needs and profile. Personal loans will be more suitable for those requiring bigger loan amounts for longer tenure. Gold loans will primarily suit those requiring greater flexibility in repayment or having poor credit profile to qualify for personal loans at reasonable rates.
(The writer is director & head of unsecured loans, Paisabazaar.com)