Personal Loan Vs Gold Loan: Which one should you go for in your hour of need?

Financial emergencies may come unannounced and it may not always be possible to arrange funds at such a short notice. What options do you have in such a case? Borrowing from friends or relatives? Preclosing your investments?

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Personal loan vs gold loan
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Most people find it hard to ask for help from their friends, either because they’re too shy or they don’t want to show that they’re in trouble. If the crisis is short-term, pre-closing investments may not really be an intelligent move? Then, what other option do you have? It’s either personal loan or a short-term gold loan. In India, gold is a popular choice for investment and with a lot of banks offering gold loan at good rates it has also become a short-term method of quickly raising funds. However, which of them to choose is the real question here. In this article, let’s compare personal loan vs gold loan through some of the important factors involved in a loan and see which one is more suitable for a particular condition.

Convenience

Sometimes, you might be in a situation when you require immediate funds and don’t even have time to go to a bank, a personal loan might be more suitable for you. While you can apply for personal loan online as well, for gold loans you will have to visit the bank for them to evaluate the gold value.

Loan amount

Naturally, the amount of money you require is the first question you must ask yourself before deciding about the preferred option. Most banks or NBFCs typically provide personal loans between INR 50,000 to INR 25 lacs. The amount you can actually receive depends on your repaying capacity which itself is dependent on your monthly income, current loans (if any), current employer, your credit score and loan tenure.

Gold loans are more flexible in this regard as they are offered for a minimal amount of INR 1000 and can go beyond crores as well. Gold loan is a fully-secure loan, as you’re giving the bank security in the form of gold which adds more value than the loan amount. The value of the loan amount depends upon the value of the gold you’ve offered for mortgage. As per RBI rulings, this amount is capped at 75% of the original value of the gold. Also, rural banks have a maximum limit of 2 lakhs for gold loans.

Interest rate

Personal loan interest rates can vary anywhere between 10% to 24% PA. The interest rate is once again dependant on your profile, including your income, employer, loan tenure and amount.

Gold loan interest rate varies between 12% to 24% PA. This interest rate it dependant on the loan tenure, ratio of loan amount vs gold value, and the mode of repayment. The interest rates will be higher for longer tenure as well as gold loans with higher loan amount: gold value ratio.

It’s always better to make use of personal loan EMI calculator to calculate the best possible scenario that can lead to the EMI which you’re most comfortable with. Compare various permutations and combinations in terms of interest rate, loan amount and tenure to get to your desired EMI.

Loan tenure

Typically, the loan tenure in a gold loan is shorter ranging between a week to 4 years. On the other hand, personal loan tenure ranges between 1 to 5 years. In fact, public sector banks don’t usually offer a tenure more than a year. Private sector banks and NBFCs can extend the tenure up to 4 years.

Now, as longer tenure is directly proportional to higher interest rates, a gold loan might be a more economical option when you’re sure that you can repay the amount within a year. Of course, if the amount is bigger than what you can pay within a year, you have no choice but to go for personal loan.

Processing time

The processing time is another important factor. If you have an urgent need of cash and cannot wait for long, a gold loan is a quicker option which can be disbursed on the same day as well. A personal loan on the other hand can take between 1 day to 1 week.

Credit score

Credit score is a big factor in approval of personal loans. A candidate having a low credit score may find it impossible to get a personal loan approval.

However, as gold loans are fully-secure loans, banks don’t pay any attention to the borrower’s credit score. Only when the gold loan amount is significantly higher and requires to be paid through EMIs, banks may do a credit score check.

Repayment mode

A personal loan is repaid through EMIs (estimated monthly instalments). An EMI includes a portion of principal as well as interest. In case you don’t pay your EMI on time, you’re bound to pay additional interest and late payment charges.

Gold loan is also flexible in this regard and offers another mode of repayment called bullet payment. Through this mode, the borrower has the option to pay both interest and principal at the end of the tenure or simply repay interest in-between the tenure and principal at the end of the tenure. The bullet repayment method is suitable for self-employed people who may not have the means to begin paying EMI immediately or might not have a constant cash flow each month.

EMI, on the other hand, is more suitable option for salaried individuals who can estimate an appropriate EMI amount which they are comfortable with before processing the loan.

Conclusion

The advantage gold loan has over personal loan is its flexibility of repayment, easiness in procuring the loan and swift processing time. However, personal loans are cheaper and more suitable for salaried individuals working with reputed employers and having a good credit score. Self-employed candidates usually find it hard to get a personal loan especially when they have a bad credit score. For them, a gold loan may seem a better option. Anyhow, before you decide between gold loan and personal loan, it’s advisable to do some digging and check the loan offers you are eligible for from several different institutions.