Unexpected financial difficulties can happen at any time, and if you haven't prepared ahead of time, you might need to take out a loan to get through them. Loans can be a lifeline in these difficult circumstances, whether they are needed to pay for a child's tuition or to cover a medical emergency. While there are many different kinds of loans accessible, the most widely used ones are personal and gold loans. Still, choosing a loan type might be challenging at times. To assist you in selecting the best loan for your requirements, this article provides a detailed comparison of personal loans and gold loans.
What is a Gold Loan ?
Banks and non-banking financial companies (NBFCs) offer secured loans, such as gold loans, up to a specified proportion of the gold you pledge as collateral. The minimum prerequisite is that you must possess gold in any form—jewelry, coins, etc.—that is at least 18 carats in grade. In addition, a borrower must provide supporting documentation for their identity and address, proof of income, etc. Although some lenders would rather conduct a mild credit check, lenders do not perform credit checks because the loan is secured by collateral. The lender is not at risk of default because the loan is secured by gold. As a result, a large number of banks and NBFCs feel confident providing a gold loan with a fair interest rate. Furthermore, as long as the loan amount is used for a valid purpose, there are no limitations on its use. The borrower may therefore use it for both personal and professional needs.
What is a Personal Loan ?
Any unsecured loan, such as a personal loan, is approved based on your credit history and your capacity to repay the loan with your own money. This loan serves a variety of purposes and can be obtained for things like purchasing the newest smartphone, paying for medical bills, financing a family member's wedding, repaying previous debts, and more. The interest rate is usually greater than that of secured loans like mortgages and auto loans, though, because it is unsecured. When submitting an application for a personal loan, you must have a thorough understanding of your financial status.
Which is a better option , a gold loan or a personal loan ?
To choose the loan that would be ideal for you, let's evaluate and compare these two options:
1. Volume of Loan
With a gold loan, the total value of the gold that is pledged determines how much is loaned. The current market price, weight, and purity of the gold are taken into account by banks and NBFCs when calculating the loan amount.
For personal loans, however, the borrower's credit history and monthly income are taken into account when determining the approximate loan amount. Personal loans typically have a maximum amount of Rs 20 lakhs, but they might be significantly higher. A personal loan may be difficult to obtain approval for if the borrower has a low credit score.
2. Temporary Processing
There is not much paperwork needed for gold loans because they are secured. Encumbrance of the gold asset by the lender until the loan is repaid further streamlines and expedites the distribution process.
On the other hand, personal loans need additional verification because they are unsecured. The procedure of processing personal loans may take longer if these documents need to be verified. As an alternative, a number of lenders now offer pre-qualified borrowers quick personal loans that can be accepted and transferred to your bank account in a matter of minutes.
3. Time of Loan
While personal loans can be taken out for longer periods of time (12 to 60 months), gold loans usually have a shorter lifespan of 6 to 12 months. Thus, a gold loan might be a great option if you need to handle a temporary financial emergency.
4. The interest rate
A personal loan is an unsecured loan that doesn't require security, whereas a gold loan is a form of secured loan that requires you to pledge your gold as collateral. Personal loans usually carry significantly higher interest rates than gold loans because of the additional risk to the lender.
The interest rates for gold loans offered by top lenders often range from 10% to 16%. In contrast, personal loan interest rates might vary from 12% to 24% or even higher.
5. The Extra Fee
When selecting between a personal loan and a gold loan, it's important to take into account all of the additional costs involved, including processing fees, foreclosure costs, late payment fees, prepayment fees, and so forth.
Prepayment penalties for personal loans may reach 5% or more, contingent on the terms and circumstances of the loan, and the processing fee may account for 2% or more of the lending amount. A flat processing cost for personal loans is now offered by many lenders, regardless of the loan amount, as a result of greater competition. As opposed to this, a gold loan usually has a processing fee equal to 1% of the loan amount.If you wish to repay the loan early or foreclose on it, there are also pre-payment penalties of about 1% for gold loans.
6. Payback of Loan
Equated Monthly Instalments (EMIs), which repay principal and interest on personal loans, are the method of repayment. Conversely, providers of gold loans typically provide a wider variety of options for repayment.
Different ways are available to lenders for repaying gold loans. If you're having trouble making ends meet and you know you'll need money soon, it might help to select a flexible repayment plan from your lenders. As an illustration, some banks and NBFCs only permit interest payments to be made over the course of a loan; the principal is due at the conclusion of the period. However, a few lenders accept EMIs for the payment of principal and interest together. Knowing the payback schedule in advance can help you choose the most convenient option for you.
Due to their unsecured nature, personal loans have stringent qualifying requirements. Upon loan approval, the lender will take into account many aspects such as age, work experience, credit score, and type of employment.
However, there aren't as many conditions to qualify for gold loans. To be eligible to borrow money, all you have to do is be at least eighteen years old and the legitimate owner of the gold you wish to pledge as security.
8. Score on Credit
In addition to possibly not meeting the qualifying requirements for a personal loan, borrowers with low credit scores may find that their interest rate is significantly greater than that of those with higher credit scores. A gold loan may be a better option than a personal loan under certain conditions.
Gold Loan and Personal Loan : Which on is better
Getting a gold loan has several disadvantages, not the least of which is that if you can't pay back the loan, the lender can sell your priceless jewellery. Consequently, your assets could be taken if you default on the debt. So, if you need a modest amount of credit for a short while or have an emergency, this can be a great solution. Individuals in the business world who are struggling financially can take advantage of gold loans, which offer flexible repayment terms and a reduced interest rate. Furthermore, the borrower can acquire additional loans based on the same gold pledge.It is important to remember, nevertheless, that you should only take out a gold loan if you are careful with money and sure that you can pay it back. Your credit score will suffer if you don't make your loan payments on time or if you fail, and the lender has the authority to sell your gold ornaments to recoup the debt, which may mean losing the priceless family gold.
Nonetheless, a personal loan is the better choice if your loan needs are considerable, you need the money for a longer period of time, or you are doubtful of your ability to repay the loan and don't want to risk the gold. You don't run the risk of losing your priceless item because it's an unsecured loan. Furthermore, a substantial loan for a longer period of time may be available to you based on your credit profile. Be aware, though, that a personal loan is among the most expensive loans out there, and that taking one out too often will trap you in debt.
Consequently, before applying for a gold or personal loan, make sure you have done your homework, carefully read over the terms and conditions and product features, and that you understand all of the repercussions.