How to Pick Between Gold Loan and Personal Loan

If you are thinking of borrowing funds for planned or unplanned expenses, then the best two options are personal loans and gold loans. Both these loans are similar and different in many ways, but serve the purpose of meeting financial requirements quickly. If you had to pick between the two, which one you would choose? Below, we have listed the pros and cons of personal loans and loans against gold so that you can take an informed decision.

What is a Personal Loan?

A personal loan is an unsecured loan, wherein you do not have to submit collateral to any NBFC or bank in order to get the funds. You can take the loan to meet an array of expenses, be it for personal or professional need. Many use the funds for travel, medical urgency, big-ticket purchase, home renovation, wedding, child’s higher education cost, debt consolidation, and likes.

To be eligible for this loan, a number of factors are considered, such as your credit score, which is expected to be at least 750+, age, employment status, stability of job, repayment capacity, net monthly income, disposable income, etc.

What Are the Pros of a Personal Loan?

Below-mentioned are some of the benefits of taking personal loans:

1. Sufficient Loan Amount: You can borrow anywhere between Rs. 50,000 and Rs. 1 crore. A standard loan scheme has borrowing range of between Rs. 1 lakh and Rs. 25 lakhs. Check with your lending institution about different loan schemes, and choose the one suitable for your requirement.

2. Short Tenure: The tenure of the loan is between 1 year and 5 years. It is comparatively a shorter tenure than that seen in case of a home loan or loan against property, where tenure can be up to 15 years to 20 years, and in some cases 30 years. So, if you wish to get done with the debt early, then a shorter tenure loan is the perfect alternative.

3. Lower Rate of Interest: The interest rate begins at 10.99%, which is much lower than interest charged in a revolving line of credit such as a credit card loan.

4. Fixed EMI: A personal loan has a fixed rate of interest, thus, the monthly instalments are also fixed, and this helps you to calculate the funds you need to keep aside for repayment every month. Thus, it makes easier for you to manage finances.

5. Minimal Paperwork: The paperwork involved in applying for this loan is minimal. All you need is KYC documents, bank statement of salary account or account that reflects your income, income proof, employment proof, and other basic documents.

6. Quick Processing: Approval and disbursal of funds is quick. Most of the financial institutions disburse funds in 24 hours to 48 hours of loan application approval.

7. Boosts Credit Score: Regular repayment towards the loan increases the chances of boosting your credit score. A good credit score will assist in obtaining a new loan in the future, as a good credit score is a sign of your high creditworthiness.

What Are the Cons of a Personal Loan?

Below-mentioned are some of the disadvantages of taking personal loans:

1. Not for People with Bad Repayment Record: There are stringent eligibility criteria for personal loan approval, including one for repayment record and credit history. You need a CIBIL score of 750+ to qualify for the loan. Any loan offer for people with lower CIBIL score may mean a higher cost of borrowing, i.e. a higher rate of interest.

2. Fee for Foreclosure and Part Payment: Do you want to close your loan early than its tenure? Or do you want to partly pay an amount to free off the debt soon? You can definitely do so, but this will come with a fee or a penal interest over and above the amount due and one that you are entitled to pay. This fee or charge can be anywhere between 1% and 3% of the outstanding loan amount.

3. Type of Employment: Most of the personal loan schemes are for salaried individuals. A very few banks and NBFCs have special schemes for self-employed people. Even if there are any such schemes, those are for self-employed professionals only such as lawyers, architects, Chartered Accountants, doctors, consultants, etc.

4. Not an Option if Ongoing Loans Are Many: If you already have too many ongoing loans, then the bank may reject your loan application. As a personal loan is unsecured in nature, your debt to income ratio must match with the criterion of the bank. You must have at least 40% to 50% of net monthly income as disposable. If you have too many EMIs to manage, the loan may not be provided to you.

What is a Gold Loan?

Unlike a personal loan, gold loans is secured in nature. Here, the bank or NBFC in question requires you to pledge gold assets, either jewelry or bank-purchased coin. In a way, a secured loan is a lot cheaper than unsecured ones, because of lower rates applicable. The loan amount is determined based on the purity and weight of the gold content in the asset. Gold purity must be between 18 carat and 22 carat.

At maximum, you can get up to 75% of the gold’s current market value as the loan amount. Though the loan is secured, but like a personal loan, this is also multi-purpose. It means the funds can be used for any purpose, business or personal needs as per your wish.

What Are the Pros of a Gold Loan?

Below-mentioned are some of the benefits of taking a loan against gold:

1. Anyone Can Apply: You do not have to be employed to attain a gold loan. Even unemployed and homemakers can apply for this loan. But, the applicant must have a repayment capacity. You can borrow between Rs. 50,000 and Rs. 50 lakhs, and in some cases you can borrow up to Rs. 1 core and higher. The tenure is short, 6 months to 2 years, so you can get done repaying the loan early and be free of debt.

2. No Stringent Rules for a Credit Score: The requirement for credit score is relaxed on this loan as against a personal loan. Here, a CIBIL of 600+ is sufficient to get the funds.

3. Quick Funds: You can get funds from gold loan the same day of the application approval, which means you can get the money in bank account within 24 hours, and as few banks claim, as quick as 45 minutes. If you have filled up the loan application correctly and got the gold asset valuated, then a lending decision is taken almost immediately.

4. Special Schemes: There are special schemes for agriculturists and women entrepreneurs. Here, the interest rates are also discounted. The standard rate begins from 10.50% to 10.99%, but farmers and women can get a discount of 1% to 2% on the standard rate.

5. Free Security to Gold: The fold pledged gets three layered free security from the financial institution. You get the assets back in a few days of completely repaying the loan amount borrowed and the interest amount.

6. Different Repayment Schemes: You can either choose EMI repayment scheme, where every month both interest and principal component will be present in the instalment. Or, you can choose a bullet repayment scheme, where during the entire tenure you have to pay only the interest component. At the end of tenure, you are supposed to pay the entire principal amount.

7. KYC Documents Only: There is hardly any paperwork involved. You have to submit identity proof, PAN card, residence proof, and your recent passport-sized photographs. No income proof is needed and you do not have to submit bills of the gold asset, until the loan amount in question is very high.

8. No Prepayment Fee Involved: Banks usually do not charge any fee for foreclosure or prepayment of the loan. Thus, if you come into funds, you can easily close the loan as per your convenience.

What Are the Cons of a Gold Loan?

Below-mentioned are some of the disadvantages of taking a loan against gold:

1. High Margin: Banks retail at least 25% of the gold’s current market value as margin. You are eligible to a maximum of 75% of the total gold value as loan amount. Depending on the purity of gold and the gold scheme, in some cases, a lower loan to value ratio is also applicable.

2. Required Collateral: You need to pledge gold jewelry or coin as collateral to get the funds. Though the bank does not have any ownership on the asset, if you are unable to repay the loan on time, and even after constant reminders you fail to repay the dues, then the financial institution can auction the gold to recover the amount you have to pay.

3. Restriction on Form of Gold: Gold bullion, biscuits, wires, or gold plated materials, are not accepted to be given a loan on, and the only accepted assets are self-owned gold jewelry or bank-purchased coins.

To Conclude

Now that you have understood the similarities and differences between a personal loan and a loan against gold, along with their pros and cons, you can pick the one that meets your immediate fund requirement. If you have idle lying gold, want to reduce the cost of borrowing, low on credit score, then a gold loan is perfect. But, if you need an unsecured loan, then a personal loan could be more suitable. So, weigh the pros and cons and decide which loan you want to apply for with financial institutions.