When it comes to borrowing money, several options are available, which makes choosing the right one tough. Gold Loans and Personal Loans are two popular options that many borrowers consider as an easy way to meet their requirements. Both have pros and cons; choosing the right one depends on your requirements, financial situation, and urgency. This article discusses gold loans vs personal loan to help you understand which may be better for you.
What is a Gold Loan?
A Gold Loan is a secured borrowing where an individual pledges their gold ornaments or coins as collateral with a bank in exchange for a loan. The amount offered depends on the value of the gold attached as collateral.
What is a Personal Loan?
A Personal Loan is an unsecured loan where you do not need to provide collateral to the bank. You can use the loan amount for any purpose, such as medical expenses, education, or travel. The loan amount and the tenure may vary depending on the bank and the borrower’s profile.
Differences Between Gold Loan and Personal Loan
- Collateral: The primary difference between a Gold Loan and a Personal Loan is collateral. In a Gold Loan, you need to pledge your gold as collateral; in a Personal Loan, you do not need to provide any collateral.
- Difference in loan Interest Rates: The interest rates for a Gold Loan are generally lower than a Personal Loan, as the bank has the security of the gold as collateral. The interest rates for a Personal Loan may be higher as the bank assumes a higher risk of lending money without collateral.
- The Loan Amount Sanctioned: The loan amount for a Gold Loan depends on the market value of the gold pledged. The lender may offer the borrowing party up to 75-80% of the gold’s value. The amount for a Personal Loan depends on the borrower’s profile, income, creditworthiness, income level, and repayment capacity.
- Repayment Tenure of the Loan: The loan tenure for a Gold Loan may vary from a few months to a few years, depending on the bank and the loan amount. The loan tenure for a Personal Loan may also vary from a few months to a few years.
- The Time taken to process a loan: The processing time for a Gold Loan may happen sooner than a Personal Loan, as the bank already has the security of the gold as collateral. The processing time for a Personal Loan may be longer as the bank needs to verify the borrower’s profile, income, and creditworthiness. In case someone is pre-approved for a Personal Loan, the request is processed almost instantaneously.
Gold Loan Vs Personal Loan Interest Rates
Generally, the interest rates on Gold Loans are generally lower than those on Personal Loans, as Gold Loans are secured loans backed by collateral, whereas Personal Loans are unsecured loans.
The interest rates on Gold Loans usually range from 7% to 29% per annum, depending on the loan amount and the bank’s policies. The average interest rates on Personal Loans in India can range between 10% and 24% per annum, based on the loan amount, borrower’s credit score, and bank policies.
It is important to note that the interest is calculated on the value of the gold pledged as collateral, which may be lower than the loan amount. In contrast, the interest on Personal Loans is calculated on the entire loan amount.
It is advisable to compare the interest rates and calculate the total interest payable on both options based on your loan amount and tenure. Additionally, consider other factors such as processing time, collateral, and credit score before deciding which one to choose.
Which One Is Better & Why?
Now that we have discussed the differences between a Gold Loan and vs Personal Loan let’s understand which may be better for you and why.
- Loan Amount: If you need a larger loan amount, a Personal Loan may be a better option, as the loan amount depends on your income and creditworthiness and not on the market value of your gold. However, if you have a higher value of gold to pledge as collateral, a Gold Loan may offer a larger loan amount.
- Interest Rates: If you are looking for lower interest rates, a Gold Loan may be a better option, as the bank has the security of your gold as collateral. If you’re anticipating events like family weddings, a Gold Loan may not be the best option, while a Personal Loan can make a quick and easy funding option. For most banks, you only need to apply on their website or their app with the required documents in their list. Remember to check their eligibility criteria before you apply for one.
- Processing Time: If you need funds urgently, a Gold Loan may be a better option, as the processing time is shorter than a Personal Loan. Alternatively, if you have time, you can explore both options and compare the processing time and other factors before deciding.
- Collateral: If you have gold ornaments or coins you can pledge as collateral, a Gold Loan may be a better option, as it will help you to get the funds easily and quickly. If you do not have any collateral or do not want to pledge your assets, a Personal Loan may be a better option.
- Credit Score: If you have a poor credit score, you may have difficulty getting a Personal Loan or may have to pay a higher interest rate. In such a case, a Gold Loan may be a better option, as the bank has the security of your gold as collateral and may not consider your credit score when considering your loan application.
Gold loans and Personal Loans have pros and cons, and choosing the right one depends on your requirements and financial situation. While both have impressive features, you’ll find it incredibly easy to take both kinds of loans at a bank.