Gold Loan vs. Personal Loan - Read all the Benefits & Drawbacks

In the world of modern finance, arranging and managing your assets becomes a monumental task. When an urgent requirement for extra money is piled on top of an already tough situation, it calls for even more intelligent financial strategizing. 

Loans are an efficient and, in many ways, beneficial method of arranging money for immediate usage. Fundamentally loans are debts and, as such, must be repaid with the interest fee that is incurred if the lender charges any. This lender may be a bank or a Non-Banking Financial Company (NBFC). 

Now there are many different kinds of loans available on the financial market. Many loans are exclusively curated for specific purposes and schemes. Vehicle loans, housing loans, education loans, credit card loans, gold loans are examples of such loans. However, there are also certain kinds of loans like personal loans where the financial institution lending the money would have no say over how the customer uses said money. 

In this article, we will briefly discuss what gold loans and personal loans are. We will be providing a basic outline of the respective advantages and disadvantages of the two types of loans.

Gold loan: Its advantages and disadvantages

What is a gold loan?

A gold loan is a variety of secured loans where the bank or NBFC will provide the customer with a loan on the insurance provided by a pre-existing asset of the customer, which happens to be the physical gold he or she owns. This gold may be in the form of bars, coins, or jewelry pieces.

Gold loans are an excellent choice for someone looking to get a loan on short notice or in need of a temporary financial boost. However, as with all things gold, loans come with their unique pros and cons, as stated below.

Advantages of gold loans:

• Effortless and rapid processing:

Since a gold loan is a kind of secured loan, banks or NBFCs do not take much time to put the application for this loan into motion. Gold loans can be taken pretty swiftly as long as certain critical documents and criteria like identification and age proof are fulfilled.

Usually, it takes a few hours only to finish loan disbursement as long as the gold being provided is checked out to be pure.

• Credit history is not an essential factor: 

Since the loan will be secured against accountable physical assets already in possession of the customer, credit history and reliability become inconsequential matters. 

Even if you have dismal CIBIL scores or have unpaid debts remaining on previously taken loans, the banks and NBFCs would overlook them. 

In fact, by paying back the gold loan in a timely manner, you can improve those credit history scores. 

• Minimal rates of interest:

Being secured loans, gold loans are not considered risky investments by financial institutions. As such, interest rates applied on gold loans are reasonably low in most cases. This implies that gold loans would cost you much less money than an unsecured loan like a personal loan in the long run.

• Availability of many repayment options:

Availing a gold loan allows you to pay back the debt in many ways, which are not permissible in the case of other varieties of loans. For example, the loan may be paid off like regular EMI schemes. Or the customer can choose to pay only the interest as periodic payment during the tenure period and repay the principal amount in a single payment when the tenure ends. Or the entire debt consisting of the interest and principal can be paid at one go when the tenure ends, without making any monthly payments.

• No pre-payment penalties:

Personal loans usually incur a pre-payment penalty charge if the loan is paid back prematurely within a stipulated time. This is mostly not the case for gold loans.

• Miscellaneous benefits:

Certain institutions can give you unique perks like a free bank locker or discounts on other services available from the same institution.

Disadvantages of gold loan:

• High margin:

Banks keep a high margin of about 25% of the net value of your gold, leaving only the remaining 75% of the value to be monetized and made available to you as a loan.

• Risk of asset loss:

The gold loan will be secured against your gold. This means if you fail to make regular, timely payments, the bank would be within its full legal rights to liquidate your gold and recover the loan.

• Length of tenure:

Mostly gold loans are provided for a very limited period by the lenders. As most loans are wrapped up within 3 years, the resultant EMI can be very high. You can use a calculating loan facility on the Money View website to determine the exact EMI.

Personal loan: Its advantages and disadvantages

What is a personal loan?

Personal loans are a kind of secured loans granted by banks and NBFCs based on a person's credit history and related scores. Such loans can be beneficial when in need of emergency financial aid or in case of any unanticipated financial circumstances.

Advantages of personal loans:

• Collateral not applicable:

As most people would tell you, the biggest benefit of availing of a personal loan is that you will not have to secure any of your valued possessions like cars, houses, or gold as collateral to get the loan. Thus even if you miss payments, you will not lose any asset, unlike gold loans.

• No bank control over usage:

How you use the money obtained as a personal loan is entirely up to you. You can use it to finance your business, buy a bike, renovate your home, or anything as long as the use is not in any illegal activity.

• Very little paperwork:

The only documents required to avail of a personal loan are basic identity proofs, address proofs, proof of income, and such essential papers. As long as these are in order, anyone can get personal loans.

• Swift disbursement:

The loan amount is usually forwarded to the customer's account within 2 working days after the approval by the bank.

Disadvantages of personal loan:

• Strict scrutiny of eligibility factors:

Since personal loans aren't secured against any tangible assets, borrowers tend to approve such loans only to reliable customers who have a steady and strong credit history with their banks. A high CIBIL score becomes very important in this case.

There are nuances to the eligibility criteria for personal loans. You can get on the website of Money View to check out your eligibility.

• High-interest rates:

Being unsecured loans, personal loans pose a greater risk to the financial institution giving them. As such, the banks and NBFCs levy a comparatively high-interest rate on personal loans compared to gold loans to justify this risk they are taking. Thus, in the long run, the net monetary expense can add up to be very high by the end of the loan tenure.

• Foreclosure penalties:

Usually, if you close your personal loan debt before at least 1 year has passed, banks charge a pre-payment penalty. Many banks don't even allow one to do so in the first place.

Conclusion:

Carefully measure the pros and cons of both gold and personal loans against each other, as provided in this article. Choose the loan that best suits your specific needs and circumstances, and plan wisely according to it.