Most of you require financial help at some point in time and you as an individual may tend to figure out various credit options to avail the proceeds of your requirement. However, there are several options out there, but you might find it tough to determine the prudent credit option. Personal loans and gold loans have swiftly become a well-known choice for exigency cash infusions. The advantages of gold loans and personal loans are clear – they are simple to obtain; their disbursement is instant, and there are zero end usage restrictions on how you must use the loan proceeds. Though credit scores are evaluated during the personal loan and gold loan applications, to assess your credibility, it makes complete sense to understand which kind of loan you must avail to match your requirements.
Read on to understand the personal loan and gold loan benefits. So, let’s begin!
What’s a gold loan?
A gold loan is an option, which is secured in nature wherein you must provide your gold as collateral or security to avail the loan. A specific percentage of the gold value is provided to you in the form of a loan. You have several options to make the gold loan repayment. Once the loan gets repaid, the lender will return your deposited gold. Moreover, as a gold loan, as is secured in nature, the interest rate on a gold loan is lower than personal loan rates. For instance, suppose you consider opting for a Union Bank gold loan, then you will notice that the Union Bank gold loan interest rate begins from 8.20 per cent per annum onwards, while the Union Bank personal loan interest rate starts from 11.20 per cent per annum onwards.
What’s a personal loan?
A personal loan by nature is an unsecured credit option. It means that you do not require holding any collateral or assets for availing the loan proceeds. As it is a collateral-free credit option, the rate of interest is most probably higher. You must make sure to repay the loan in simply monthly EMIs across the loan repayment tenure.
Both the personal loan and gold loan do not have any end usage restriction on the usage of loan proceeds. They even have a lower processing time, which makes both options preferred for meeting your financial exigencies and monetary shortfalls. As an outcome, if you are one of those with spare gold, you might find is extremely tricky to select between a personal loan and a gold loan.
Personal loan vs gold loan
To put this in simple words, a gold loan is a proceed against gold. It is a secured credit option wherein you as a borrower pledge gold security and get a percentage of gold value as the loan proceeds. In general, LTV or loan to value for gold loan is just up to 75 per cent and might differ from one bank lender to another. Once the loan proceeds are processed and disbursed, you as a borrower pay the loan according to your agreed terms and conditions. Once you as a loan borrower repay the whole loan proceeds, the lender will give you back the gold that you availed in the form of security or collateral. In the scenario of a gold loan, as you, as a borrower are providing your gold security or asset as collateral, your credit profile or score would be of very less importance in determining your loan approval chances. To get a gold loan, you as an applicant first require taking your gold assets to the concerned NBFC or bank for the value and weight evaluation of gold. The gold loan tenure is generally from 7 days to 36 months.
Also Check: Union Bank Gold Loan Interest Rate
On the other hand, a personal loan is an unsecured credit option, even called a signature loan, that does not require you as an applicant to offer any security or collateral to the loan lender. Unlike a gold loan, a personal loan is not disbursed instantly by the NBFCs and banks as they take considerable time to evaluate your credit history before providing you with the loan proceeds. In this way, the lender gets a better view of your credit repayment history. Thus, note that your credit history plays a crucial role in loan application approval. Besides your credit history and score, the proceeds required by you as a borrower are even evaluated by the NBFCs and banks depending on your monthly income. To get a personal loan, you need not approach any NBFC or bank by visiting their branch physically, as you can easily apply for the same online. The personal loan tenure is generally between the range of 1 year and 5 years.
Let’s go through these 2 loan options –
Processing time
You as a personal loan applicant require submitting your ITR form or pay slip and different documents to process your loan application. As authentication and verification of such documents take time, the regular personal loan disbursement generally takes a few days. However, in the case of a pre-approved personal loan, the loan proceeds may be disbursed instantly on the same day of placing the application for a loan. On the contrary, gold loan disbursal may take a few hours to a few days as the security you submit must be evaluated by the lender and based on the evaluation your loan proceeds are decided – all of it takes some time.
Loan proceeds
Loan proceeds range anywhere between Rs 50,000 and Rs 20 lakh in the case of personal loans. At times, few lenders may agree to provide loan proceeds of as high as Rs 40 lakh also. Your eligible loan proceeds are based on your income, loan tenure, and your repayment potential. Being a loan option, which is secured in nature, the loan proceeds in the scenario of a gold loan majorly based on the valuation of the deposited gold as security or collateral. However, note that RBI (Reserve Bank of India) has barred the lenders from disbursing the gold loan of over 75 per cent of the gold’s value.
Interest rate
Personal loan interest rates range anywhere between 10 and 26 per cent per annum. The gold loan interest rate ranges from around 7 per cent to 29 per cent per annum based on the loan repayment tenure, loan-to-value or LTV ratio and the kind of repayment option. The gold loan interest rate may be higher for you if you opt for a longer repayment tenure. If you are one of those with a strong credit profile and score, the interest rates might vary much between a personal loan and a gold loan. However, a loan against gold may prove to be a better option for you if you have a low credit profile.
Credit period
Personal loan repayment tenure ranges between 1 and 5 years, with few lenders willing to offer a higher repayment tenure of 7 years. For a gold loan, repayment tenure ranges anywhere between 7 days and 3 years. Few lenders are willing to offer a higher repayment tenure of as high as 4 years. As higher repayment tenure converts to a higher interest constituent, choosing a gold loan may be a highly cost-effective choice for you if you are confident of making the loan repayment in a year or by two to three years. However, a personal loan would be a prudent choice for you if you are looking for higher loan proceeds as well as higher repayment tenure.
Repayment option
A personal loan can be repaid in EMI form, which involves both principal and interest constituents. On the contrary, gold loans have different repayment choices besides the EMI-linked repayment structure. For instance, few gold loans allow you as a borrower to service just the interest constituent every month except for the principal constituent to be repaid on the maturity date, others have the option to pay the interest constituent during the loan disbursement, wherein a principal constituent is paid by the end of the repayment tenure. Thus, the non-EMI option available in a gold loan might be suitable for you if you are witnessing short-term monetary shortfalls and repayment constraints.
Processing charges
Processing charges for a personal loan generally goes high as 3 per cent of the loan proceeds. In the scenario of a gold loan, few lenders may levy a flat processing charge, while others may levy a charge of between 0.10 per cent and 2 per cent of the loan proceeds. Thus, when selecting between the 2 loan options, make sure to compare the credit options processing fees. Considering the processing charge will allow you to understand the overall cost of getting the loan.
Ending note
The decision between a personal loan and a gold loan basically depends on your needs and profile as a borrower. A personal loan may be better and more suitable for you if you need loan proceeds for a higher duration. On the contrary, a gold loan may be suitable for you if you require a flexible repayment schedule or have a low credit profile and score and are unable to qualify for an instant or regular personal loan owing to such reasons to meet your urgent monetary mismatches.
