When you need quick funds, personal loans and gold loans are popular options. Both offer fast disbursal, flexible usage, and competitive interest rates. While credit scores play a role in approval, gold loans are often easier to secure due to collateral.
This guide breaks down the benefits, key differences, and suitability of each—helping you choose the right loan for expenses like medical emergencies or education.
What is a Gold Loan?
A gold loan is a secured loan where you need to deposit your pledged gold assets (Gold ornaments or jewellery) as collateral. A certain percentage of the value of the gold collateral 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.
In general, the Loan-To-Value (LTV) ratio for gold loans goes up to 75% of the gold's value 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.
What is a Personal Loan?
A Personal Loan is an unsecured loan. This means that you do not need to hold any assets as collateral, making it distinct from secured loans. Since this is a collateral-free loan, the interest rate is likely to be higher. You must repay the loan in easy Equated Monthly Installments (EMIs) throughout the tenure of the loan.
Both gold loans and personal loans provide flexibility, do not come with any end-use restriction on the loan income, making them great options for quick cash and financial emergencies. 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.
Comparing Gold Loans vs Personal Loans
In the case of gold loans, since the borrower is giving their gold assets as security, the credit score could be slightly less important in deciding 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 that don’t require any collateral, making them accessible to borrowers with a strong credit profile. Unlike gold loans, they aren’t disbursed instantly, as lenders assess the applicant’s credit history, score, and monthly income before approval.
This thorough evaluation helps determine repayment capacity and loan eligibility. With digital banking, personal loans can be applied for online without visiting a branch. Typically, the repayment tenure ranges from 12 to 84 months, offering flexibility based on the borrower’s financial situation.
Let Us Analyse 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 50 lakhs in the case of unsecured personal loans. It usually depends on the 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 market value and valuation of the gold deposited as collateral. However, remember that the RBI has barred lenders from sanctioning gold loans above 75% of the value of gold, which is a crucial point for loan eligibility.
Interest Rates
The interest rate of a personal loan ranges from less than 9.99% to 26% p.a. The interest rate on the gold loan can range from 7.25% to 29% p.a., which may be considered a higher interest rate depending on loan tenure, along with potential prepayment charges, LTV (loan-to-value) ratio, and type of repayment option.
The interest rates on gold loans are generally higher for those with longer tenures. For those with a good credit score, the interest rates may not differ much between a gold loan and a personal loan, and they may qualify for lower interest rates. However, a gold loan can prove to be a comparatively good option for those with a poor credit profile, especially in a temporary financial emergency.
Credit Period
Personal loan tenures range from one to five years, with some lenders offering as high as seven years for a flexible repayment tenure. 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 typically repaid through equated monthly instalments (EMIs), which cover both the principal and interest components. In contrast, gold loans offer more flexible repayment options beyond the standard EMI model and usually involve minimal documentation.
Some gold loan schemes allow borrowers to pay only the interest each month, with the principal due at maturity, while others permit upfront interest payment, deferring the principal to the end of the term. These non-EMI structures can be ideal for individuals dealing with temporary cash flow issues or irregular income, highlighting the adaptability of gold loans compared to the fixed structure of personal loans.
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 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.
To Conclude
The choice between a gold loan and a personal loan will primarily depend on the needs and profile of the borrower, as well as other factors like financial stability. Personal loans will be more suitable for those who need a larger loan amount for a longer duration, depending on the borrower's creditworthiness. Gold loans will primarily be suitable for those who require more repayment flexibility or have a low credit score to qualify for a personal loan at reasonable rates.
Frequently Asked Questions
What is the difference between a Personal Loan and a Gold Loan?
A personal loan is an unsecured loan and doesn’t require collateral, unlike the collateral required for a gold loan, while a gold loan is secured against your gold assets. Personal loans depend heavily on your credit score, whereas gold loans are based on the value of your gold and are accessible even for those lacking a high credit score.
Can I use a Personal Loan or Gold Loan for any purpose?
Yes, both personal and gold loans come with no end-use restrictions. You can use them for medical expenses, education, travel, and also for any financial institution-related expenses.
What documents are required for a Personal Loan?
Typically, you need ID proof, address proof, income proof (salary slips or ITR), with a steady income and bank statements.
How much loan can I get against my gold?
You can get up to 75% of your gold pledged based on the market value, which defines your borrowing limit, subject to lender policies and gold purity.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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