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.
Difference Between Gold Loans and 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:
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.
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