Gold Loan vs Personal Loan, Which one is better for you?

Everyone needs financial assistance from time to time, and people tend to find loan options to avail of it. However, there are many options out there, and you may have difficulty deciding between them. Gold loans and personal loans have fast become well-known options for emergency cash infusions. The benefits of personal loans and gold loans are clear – they are easy to obtain, their loan disbursement is quick, and there are no restrictions on how you use the loan proceeds. Though credit scores are checked during gold and personal loan applications to assess the creditworthiness of the borrower, it makes sense to understand which type of loan to avail of, to suit your needs.

Let us understand the benefits of personal loans and gold loans. Later, we will differentiate between the features of both these loans to find out the best option for your financial needs. So, let's get started.

What is Gold Loan?

A gold loan is a secured loan where you need to deposit your gold assets as collateral. A certain percentage (not more than 75%) of the value of the gold is given to you as a loan. You have several options to repay the gold loan. Once the loan is repaid, the lender returns the deposited gold to you.

What is Personal Loan?

A personal loan is an unsecured loan. This means that you do not need to hold any assets as collateral. Since this is a collateral-free loan, the interest rate is likely to be higher. You must repay the loan in easy monthly EMIs throughout the tenure of the loan.

Both gold loans and personal loans do not come with any end-use restriction on the loan income. They also have shorter processing times, which makes them a preferred choice for meeting financial shortfalls and emergencies. As a result, those who have some gold to spare may find it tricky to choose between a gold loan and a personal loan.

Gold Loans vs Personal Loans

Simply put, a gold loan is a loan against your gold. This is a secured loan in which the borrower pledges their gold asset and receives a percentage of the value of the gold as the loan amount. In general, the Loan-To-Value (LTV) ratio for gold loans is up to 75% and may vary from one lender to another. Once the loan amount is sanctioned and disbursed, the borrower pays the loan as per the agreed terms. Once the individual repays the entire loan amount, the lender returns the gold taken as collateral to the borrower.

In the case of gold loans, since the borrower is giving their gold assets as security, the credit score could be slightly less important to decide loan approval. To avail of a gold loan, the person needs to take their gold assets to a bank or NBFC for assessment of their value. The tenure of a gold loan is usually between 7 days and 36 months.

Personal loans are unsecured loans also known as signature loans and do not require the borrower to provide any collateral to the lender. Unlike gold loans, personal loans are not sanctioned instantly by banks and NBFCs, as they take time to check the credit history of the borrower before sanctioning the loan. In this way, lenders get a clear idea of the credit payment history of the borrower. Hence, credit history plays an important role in the approval of the loan application. Apart from credit score and history, the amount required by the borrower is also assessed by banks and NBFCs based on their monthly income. To avail of a personal loan, one need not visit any bank or NBFC as they can now easily apply for it online. The tenure of a personal loan is usually between 12 months and 60 months.

Let us analyze these two loan options:

• Processing Time
  Personal loan applicants need to submit their pay slip/ITR form and various other documents to process their loan application. As the verification of these documents requires some time, disbursement of personal loans usually takes a few hours or days from the date of the loan application. On the other hand, a gold loan can be disbursed within a few hours, since the collateral is with the borrower and it has immediate liquidation value.
   
• Loan amount
  The loan amount ranges from Rs 50,000 to Rs 20 lakhs in the case of personal loans, while sometimes can go up to Rs 40 lakhs. It usually depends on the loan tenure and repayment capacity of the borrower. Being a secured loan, the loan amount in the case of a gold loan mainly depends on the valuation of the gold deposited as collateral. However, remember that RBI has barred lenders from sanctioning gold loans above 75% of the value of gold.
   
• Rate of interest
  The interest rate of a personal loan ranges from less than 10% to 26% p.a. The interest rate on the gold loan can range from 7.25% to 29% p.a., depending on loan tenure, LTV (loan to value) ratio, and type of repayment option. The interest rates on gold loans are generally higher for those with longer tenure. For those with a good credit profile, the interest rates may not differ much between a gold loan and a personal loan. However, a gold loan can prove to be a comparatively good option for those with a poor credit profile.
   
• Credit period
  Personal loan tenures range from one to five years, with some lenders offering as high as seven years. For gold loans, the tenure ranges from seven days to three years, with some lenders offering tenures of up to five years. As a longer loan tenure translates into higher interest costs, opting for a gold loan can be a more cost-effective option for those confident of repaying their loan within a year or two. A personal loan would be a better option for those seeking a higher loan amount and longer tenure.
   
• Repayment option
  Personal loans are repaid in the form of EMIs, which include both interest and principal. On the other hand, a gold Loan allows various repayment options apart from the EMI-based repayment structure. For example, some gold loans allow borrowers to service only the interest component each month except for the principal amount to be repaid on the maturity date, others allow the option to pay their interest amount during loan disbursement, in which the principal component is paid for end of the loan term. Hence, the non-EMI option of a gold loan may be suitable for those facing short-term cash flow mismatches and repayment constraints.
   
• Processing fee
  The processing fee for a personal loan usually goes up to 3% of the loan amount. In the case of a gold loan, some lenders charge a flat processing fee, while others charge 0.10% to 2% of the loan amount. Hence, while choosing between both the loan options, compare their processing charges. Factoring in the processing fee will help you work out the actual cost of availing of the loan.

Conclusion

The choice between a gold loan and a personal loan will primarily depend on the needs and profile of the borrower. Personal loans will be more suitable for those who need loan amounts for a longer duration. Gold loans will primarily be suitable for those who require more repayment flexibility or have a poor credit profile to qualify for a personal loan at reasonable rates.