Gold Loan Vs Personal Loan - Which is Better?

For us Indians, gold will always remain a secure investment that keeps our minds at peace when any other mode of investment or income seems to fail us. The recent fall in gold prices has created great interest among investors to stock up on this asset. Some may even wait for further fall. There are even experts predicting an end to the bull run that gold prices have enjoyed so far.

With gold prices sharing such mixed market signals,  it has to be said that now could be the best time to avail a loan against gold. It is generally seen that getting a gold loan fares way better than getting the other alternative to it - personal loan. Sceptical? Well, Let’s see how a loan against gold works better than a personal loan, taking into consideration all their pros and cons.

Paperwork for personal loans is not very elaborate, as long as basic eligibility parameters are met and KYC documents are furnished. While it is true that there are few financial products that can match the  versatility and flexibility of  personal loans, the emergence of secured gold loans bodes well for the loan scape, especially under the current circumstances that warrant an unstable employment scene. 

That being said, both forms of loans have a number of pros and cons to be taken into consideration in some detail before coming to a verdict on which one might be better. Read on to learn more on how the gold loan product differs from a personal loan, with all their drawbacks and advantages accounted for.

Personal Loans

A personal loan is unsecured, which means that it does not need you to pledge any asset/property (business or personal) in order to get the amount. One can get a personal loan and utilise it for a number of personal or professional requirements - to fund a wedding, getting household appliances, tackling a medical emergency, funding children’s higher education, consolidating past debts, or even going on a trip abroad!

The eligibility criteria, which is often what makes or makes or breaks the deal in case of personal loans,  incorporates numerous factors. This can include a good credit history (generally with a credit score of 700 or higher), the applicant’s age and employment status, regular monthly income, etc.

In further detail, let’s take a look for pros and cons of what a personal loan brings to the table:

The Pros of Personal Loans

- Collateral Free: If someone wants to take out a personal loan, they wouldn't have to lay down any of their personal or business assets as collateral. This makes personal loans more accessible to those who have no security to offer, but do have a regular source of income.

- Versatile: The scope of personal loans is really helpful to borrowers, as it can be used for any kind of fiscal need at an individual level. This can include consolidating past debts, paying for weddings or other big-ticket expenditure, and more.

- Simple documentation: The paperwork for availing a personal loan is quite easy, needing you to furnish your KYC documents and meet basic eligibility parameters.

- Funds Quickly Disbursed : Funds are approved and disbursal quite quickly, with many lenders crediting the amount to your account within 24-48 hours.

The Cons of Personal Loans

- Strict prerequisites (credit score and credit history): Since personal loans are not secured by collateral, banks need to be thoroughly assured of the borrower’s repayment capacity before approving a loan. For this reason, banks undertake stringent perusal of your credit management history  and present credit score to deduce your financial capability.

- Higher interest rates: As they are unsecured, lenders assess personal loans to be riskier options as against loans with security. So, personal loans draw comparatively higher rates of interest.

- Processing Fees: Since personal loans are provided without collateral security, banks are required to invest in scrutinising your income and credit history. Hence, they will charge you an additional processing fee, which can be upto 1% of the loan amount.

Gold Loans

When kept safely within a locker, idle gold jewelry assets don’t get you any returns. Sanctioned based on the value of the gold article, Gold loans are a great way to utilize such valuable idle items in times of real need.

Gold loans are secured, which leads to lenders offering relatively lower rates of interest. The idea of such loans is on the basis of pledging your gold to provide security for the loan amount.

The Pros of Gold Loans

- Quick processing: Lenders generally verify only the necessary documents before they sanction a gold loan. So the approval process is made less tedious, and the amount can be disbursed to your account within just a few hours, in most cases.

- No credit history check: Your credit score does not greatly impact the approval of your gold loan. Nevertheless, it is best to check your credit score from a credit agency and take action to repair it, if necessary, especially if your score is below 500.

- Lower interest rates: As a secured loan, gold loans normally draw lower interest rates as opposed to personal loans, while offering the same level of versatility in use. 

- No prepayment fees: Unlike personal loans, the borrowers do not have to pay an additional fee for foreclosure of gold loans. This offers great flexibility in terms of how the borrower decides to repay the loan - either in installment or in bulk.

The Cons of Gold Loans

- Retention of a high margin by the lender: A lender normally sanctions gold loans for more or less 75% of the total value of the gold article. This means that the remaining 25% is a margin kept by the lender.

- Collateral: It goes without saying that you have to pledge the gold article as security to get a gold loan. This implies that the lender keeps the right to ownership of the asset and even to sell it in order to recover dues, if you are to fail repayment of the debt in full.

- Short tenures: Mostly, gold loans are allowed for a tenure that goes up to a maximum of 3 years. Given that the loan amount might be higher, a tenure this short can really increase the EMIs (monthly installments) towards the loan. Therefore, proper financial planning beforehand, is needed in such a situation.

Which should you choose?

The discretion of whether to choose a personal loan or a gold loan is completely dependent on your financial capabilities and needs as a borrower. If you want to get  better flexibility of repayment, have a poor credit score, need a large loan amount immediately, and you are comfortable with repaying it in the span of a short tenure of around 3 years, it may be in your best interest to choose a gold loan. On the other hand, borrowers with a great credit score and a regular source of income that can sustain a more drawn-out repayment tenure, a personal loan could very well be the better option.

Gold loans can, in fact,  serve as a great alternative to personal loans. You could use a gold loan in many ways. It could help you pay off liabilities like credit card outstanding immediately, without accumulating further interest. You could fund medical emergencies using an instant gold loan. A gold loan could also help pay for other important and unprecedented expenses in your life.

The best part, perhaps, is that if you run a business, then you could get an overdraft facility loan against any gold ornaments you have in your possession. This helps meet working capital needs as and when they arise. You end up paying a simple interest only for the sum used for the given number of days. The overdraft facility against gold can even be looked at as a very worthy alternative to creating an emergency fund.

While a salaried employee could find it hard to set aside an amount that equals a whole year's expenditure aside, this gold loan instrument can allow him/her to get funds as and when needed. So, gold loans can be a great way to keep your finances secure and strong in a variety of circumstances. You could apply for a gold loan with us right away!