If you are looking for a loan to meet your financial emergencies or goals, you might be wondering whether to opt for a personal loan or a gold loan. Both these types of loans have their own advantages and disadvantages, and the best option for you depends on various factors, such as your loan amount, tenure, interest rate, eligibility, and repayment flexibility. In this blog, we will check out all the basics surrounding personal loan vs gold loan.
What is a Personal Loan?
A personal loan is a type of unsecured loan that does not require any collateral or security. You can use it for any purpose, such as medical expenses, education, travel, home renovation, wedding, etc. You can take a personal loan from a bank, a non-banking financial company (NBFC), or an online lender based on your income, credit score, and other criteria. The loan amount, tenure, and interest rate are fixed at the time of loan approval and disbursal.
What is a Gold Loan?
A gold loan is a type of secured loan that requires you to pledge your gold ornaments or coins as collateral. The loan amount is determined by the value and purity of your gold, which is assessed by the lender. You can use the loan amount for any purpose as long as it is legal. You can borrow a gold loan from a bank, an NBFC, or a gold loan company based on your gold value and other criteria. The loan amount, tenure, and interest rate may vary depending on the market conditions and the lender’s policies.
Personal Loan vs Gold Loan: Comparison
Now that you know the basic difference between a gold loan and a personal loan, let us compare them on some important factors:
Personal Loan vs Gold Loan: Explore the Key Differences
| Feature | Personal Loan | Gold Loan |
| Borrowing Limit | Rs. 50,000 to Rs. 20 lakhs or more | Rs. 10,000 to Rs. 15 lakhs |
| Loan Duration | 12 to 60 months | 6 to 12 months |
| Interest Rate | 12% to 20% | 10% to 16% |
| Additional Charges | 2% or more processing fee, 5% or more prepayment fee | 1% processing fee, 1% prepayment fee |
| Eligibility Requirements | No collateral but strict eligibility criteria | Gold assets as collateral |
Loan Amount
The loan amount that you can borrow depends on your eligibility and the lender’s policies. Generally, personal loans offer higher loan amounts than gold loans, as they are based on your income and creditworthiness. You can borrow a personal loan up to Rs. 40 lakhs, depending on the lender.
On the other hand, gold loans offer lower loan amounts, as they are based on the value of your gold. You can borrow a gold loan up to 75%-80% of the value of your gold, depending on the lender.
Loan Tenure
It is the period within which you have to repay the loan. Generally, personal loans offer longer loan tenures than gold loans, as they are meant for larger and longer-term expenses. You can repay a personal loan in 12 to 60 months, depending on the lender.
On the other hand, gold loans offer shorter loan tenures, as they are meant for smaller and shorter-term expenses. You can repay a gold loan in 3 to 36 months, depending on the lender.
Interest Rate
The interest rate is the cost of borrowing the loan. Generally, personal loans charge a rate higher than those of gold loans, as they are unsecured and riskier for the lender. You have to pay an interest rate of 10% to 24% per annum, depending on the lender and your credit profile.
On the other hand, gold loans charge lower interest rates, as they are secured and safer for the lender. You have to pay an interest rate of 7% to 16% per annum, depending on the lender and the market conditions.
Eligibility
Generally, personal loans have stricter eligibility criteria than gold loans, as they are based on your income and credit history. You have to meet the minimum age, income, employment, and credit score requirements of the lender.
On the other hand, gold loans have simpler eligibility criteria, as they are based on your gold value. You only have to meet the minimum age and KYC requirements of the lender.
Repayment Flexibility
The repayment flexibility is the ease and convenience of repaying the loan. Generally, personal loans have less repayment flexibility than gold loans, as they have a fixed repayment schedule and amount. You have to pay a fixed monthly instalment (EMI) every month, which includes the principal and interest components. If you miss or delay any EMI, you may have to pay a penalty or a higher interest rate.
On the other hand, gold loans have more repayment flexibility, as they have different repayment options and schemes. You can choose to pay only the interest during the loan tenure and the principal at the end, or pay both the interest and principal in instalments or pay as per your convenience, as long as you clear the loan within the tenure.
If you want to prepay or foreclose the loan, you may have to pay a nominal or no charge.
Pros and Cons: Personal Loan vs Gold Loan
Here are the advantages and disadvantages of each type of loan:
Personal Loans
Personal loans do not require any collateral. You can use them for any purpose, and they usually have lower interest rates than credit cards.
However, personal loans also have strict eligibility criteria, such as a good credit score, a minimum income, and a stable employment history.
You also have to pay processing fees and other charges, which can increase the cost of borrowing.
Moreover, missing or defaulting on your repayments can negatively affect your credit score & future borrowing prospects.
Gold Loans
Gold loans require you to pledge your gold assets, such as jewellery or coins, as collateral. You can get up to 75% of the market value of your gold as the loan amount, and the interest rates are usually affordable.
You also do not need a credit score or a credit history to get a gold loan, and the processing is fast and easy.
However, gold loans also have some drawbacks, such as the risk of losing your gold if you fail to repay the loan, the fluctuation of gold prices and quality, and the high margin that lenders charge.
How to Choose Between Personal Loan and Gold Loan?
As you can see, both personal loan and gold loan have their pros and cons, and the best option for you depends on your needs and preferences.
Here are some things to keep in mind when making a choice: personal loan vs gold loan.
• If you need a higher loan amount for a longer duration and have a good income and credit score, you could go for a personal loan.
• If you need a lower loan amount for a shorter duration and have gold assets and a poor or no credit score, you could go for a gold loan.
• If you are looking for a lower interest rate and a simpler eligibility process, you might want to go for a gold loan.
• If you are looking for a longer loan tenure and a fixed repayment schedule, you can consider a personal loan.
• If you are comfortable with pledging your gold as collateral and risking its loss in case of default, a gold loan is often the choice.
• If you are not comfortable with pledging your gold as collateral and want to keep it safe, you must prefer a personal loan.
Conclusion
Personal loans and gold loans are two popular types of loans that can help you meet your basic financial needs. However, there is a difference between gold loan and personal loan in terms of features and benefits, as shared above. You must compare them carefully before applying for one that suits your needs. Don’t forget to compare the offers and terms of different lenders and choose the one that suits you the best.
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