Facing sudden expenses like weddings or medical bills? Turning to credit options - like gold and personal loans - can help you weather these expenses without dipping into your emergency fund.
While these are the most popular credit options, questions like whether a gold loan is a secured or unsecured loan and the risks of personal loans have plagued many potential borrowers.
What is a Gold Loan?
A gold loan is a secured loan sanctioned against the gold assets (jewellery and coins) you pledge to the lender. Lenders follow RBI guidelines and offer up to 75% loan value. The pledged gold stays with the lender as collateral, which can be auctioned on default.
Advantages and Disadvantages of Gold Loans
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Advantages of Gold Loans
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Disadvantages of Gold Loans
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Affordable interest rates
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Fluctuating gold prices and the gold’s quality can affect the loan amount
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Easy application and swift processing
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Defaulting on the loan can result in loss of gold
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Flexible repayment structures
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High margins since the LTV ratio doesn’t cover 100% of the gold’s market value
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No credit history required
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What is a Personal Loan?
A personal loan is an unsecured loan, sanctioned without a collateral. Eligibility for the loan is based on your credit score, credit history, repayment capacity, employment status, and any other eligibility parameter set by the lender.
Advantages and Disadvantages of Personal Loans
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Advantages of Personal Loans
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Disadvantages of Personal Loans
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Collateral-free loans
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Processing fees of up to 4% increase your cost of borrowing
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Relatively lower interest rates compared to other unsecured credit options like credit cards
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Strict eligibility criteria, including minimum income parameters
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Timely repayments can help improve your credit score and build a credit history
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A good credit score is a prerequisite for lower interest rates
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Multipurpose loans without end-use restrictions
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Missed EMIs and payment defaults can impact your credit score, affecting future credit prospects
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Gold Loan Vs. Personal Loan: A Quick Assessment
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Parameter
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Gold Loan
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Personal Loan
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Collateral
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Gold loans are secured loans sanctioned against pledged gold items.
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Personal loans are collateral-free, unsecured loans.
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Credit Score
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Not considered.
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A credit score of 750 or more required.
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Loan Amount
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Banks and NBFCs can lend up to 75% of the gold’s market value.
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Personal loans can range up to Rs. 25 Lakhs or more. However, the loan amount depends on the borrower’s repayment capacity, credit score, etc.
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Interest Charged
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Interest rates start from 5.88% p.a.
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Interest rates start from 10.49% p.a.
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Loan Tenure
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Short tenures ranging from 6-36 months.
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Long tenures ranging up to 5 years.
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Processing Time
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Processed and disbursed within hours.
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Processed and disbursed within 7 days.
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Repayment Terms
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Multiple payment options including one-shot payments, EMIs, bullet payments, or deferred principal payment.
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Fixed EMIs need to be paid for the selected repayment duration.
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Foreclosure Charges
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Most lenders waive off foreclosure charges.
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Personal loan foreclosure fees can range up to 6% of the outstanding loan amount.
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Gold Loan or Personal Loan: Which is Better?
Gold loans and personal loans have pros and cons. Gold loans offer lower interest rates without credit score checks, but you risk losing assets. Personal loans offer unsecured funding with longer repayment windows, but defaulting on them can damage your credit score.
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Frequently Asked Questions
1. What exactly is a gold loan, and how does it differ from a personal loan?
A gold loan is a secured loan sanctioned against the gold assets one has to pledge with the lender. Unlike personal loans, gold loans require collateral.
2. Which is cheaper: gold loan or personal loan?
The secured nature of gold loans makes their interest rates much more cost-effective. Personal loans come with a higher interest rate given the lender’s increased lending risk.
3. How do collateral requirements differ for gold and personal loans?
Gold loans cannot be sanctioned with gold collateral. The loan amount is calculated as a percentage of the current market value of the pledged gold. However, personal loans don’t require any collateral.
4. How do credit scores affect eligibility for these loans?
Gold loans don’t consider credit scores. A credit score of 750 and above is favoured for a personal loan. The higher your credit score, the better your chances at lower interest rates.
5. What are the risks and benefits of choosing a gold loan versus a personal loan?
Gold loans offer low-interest, short-term credit, even with poor credit score. Risk: losing assets for missed payments. Personal loans: longer tenure, no collateral, but default affects credit score.
