As both gold loan and personal loan offer competitive interest rates and quick loan disbursal, many borrowers often struggle to decide which one to go for. Here's all you need to know.
As both gold loans and personal loans offer competitive interest rates (gold loans 9.85%-26% and personal loans 10.75-24%), quick loan disbursal and no restriction on end usage, many borrowers — especially those owning gold — often struggle to decide which one to go for. Here are some crucial factors that should help the decision:
What works in favour of gold loan?
# Availability of higher loan amount
Gold loans usually outscore personal loans in terms of maximum cap on the loan amount. Most lenders offer personal loans for up to Rs 40 lakh, whereas gold loans are being offered for a maximum of Rs 1.5 crore. In case you require a higher loan amount urgently, gold loans would be a more suitable option to fulfill such a need. Moreover, gold loans can also be availed for a loan amount as low as Rs 1000, whereas personal loans are usually offered for a minimum amount of Rs 5000.
# Lesser emphasis on credit score
Gold loans, being fully secured against the gold pledged, are quickly disbursed without laying much emphasis on the borrower’s credit score. This makes it possible for the borrowers with low credit score to avail a loan in times of need, when other loan options aren’t available. Lenders can recover the outstanding dues by selling the pledged ornaments, in case the borrower defaults. However, if the loan amount involved is on the higher side, the lender may lay emphasis on the credit score of the applicant, to determine the risk and likelihood of him/her defaulting in future while repaying the huge amount involved, along with the interest applicable.
On the other hand, credit score is a vital parameter for lenders while evaluating an applicant’s personal loan request. The loan amount, interest rate, tenure and other service terms and conditions of a personal loan are set as per the credit score and repayment capacity of the borrower. In case the borrower has a low credit score, the lender may either reject the loan request, or approve with a higher interest rate. In such cases, the borrower would have to accept the interest rate and other terms and conditions levied, since a low credit score doesn’t leave him/her in a position to perform much negotiation.
# Minimal documentation and higher repayment flexibility
Gold loans involve probably the least degree of documentation amongst various forms of credit, with most lenders requiring just basic documents such as identification proof, address proof of the borrower. Personal loans, however, have a more detailed documentation process. Along with address and identification proofs, income proof, bank statement etc. are needed.
Moreover, many lenders offer various flexible repayment modes for gold loans, such as the option to pay the interest portion upfront or on monthly basis and the principal at the end of loan tenure, bullet repayment (repay principal along with interest amount at the end of loan tenure) etc. Such flexibility in repayment isn’t yet available for personal loans. Lenders mostly require the borrower to repay the personal loan through regular EMIs involving both the interest as well principal component.
What works in favor of Personal loan?
# Higher tenure
Personal loans outscore gold loans in terms of maximum loan tenure offered, since the latter usually offers loan tenure up to a maximum of 3 years, whereas most lenders offer personal loans for a period of up to 5 years, with some lenders even offering tenures stretching up to 7 years. Longer repayment periods help in reducing the monthly EMI outgo and the borrowers can, therefore, conveniently pay off the loan timely without straining their monthly budget and liquidity.
# Higher degree of convenience
Since availing a gold loan involves submission, processing and evaluation of the pledged gold ornaments, the borrower would be required to pay at least one visit to the concerned lender’s branch. Only post the gold’s valuation and purity check would the lender be able to decide upon the loan’s amount. Visiting the branch may not be possible for all borrowers and may cause inconvenience if the concerned lender doesn’t have a branch nearby, especially in rural and sub-urban areas of the country.
Personal loans offer much more convenience, especially after the arrival of online financial marketplaces. Borrowers can easily compare amongst various lenders and apply for the most suitable lender digitally. A borrower, therefore, can get the personal loan approved and the money credited into his/her account, without a single visit to the lender.
Which one should you choose?
The decision to choose between a personal loan and a gold loan completely depends on the borrower’s profile and needs. In case you wish to avail higher degree of repayment flexibility or have a low credit score or need a higher loan amount urgently, and are comfortable in repaying it within a shorter time period of up to 3 years, you may choose to avail a gold loan. However, for those borrowers who have a good credit score, stable income and require higher repayment tenure, personal loans would be a better option.
(By Gaurav Aggarwal, Associate Director-Unsecured Loans, Paisabazaar.com)