If you have been scouting for a loan and have some gold with you, it’s time to junk the ‘unsecured’ personal loan route and opt for the fast-emerging gold route option. Many of us are very attached to our jewellery given the emotions entwined with the gold, a wedding gift, birthday or anniversary gift, among others. As a result, we prefer keeping it in the safe confines of bank lockers. However, the perception is fast changing and many of us are using this idle gold to raise short-term loans at interest rates cheaper than those offered on personal loans.
Benefits of gold loan versus personal loan
Rate of interest:
Gold loan rate of interest is cheaper compared to an ‘unsecured’ personal loan. A loan against gold can be obtained for 13%–16%, whereas the rate of interest on a personal loan hovers between 12% and 24%.
A gold loan scores over personal loans on the aspect of pre-payment charges as well. In case of a gold loan, you can pre-pay your loan anytime and most NBFCs or banks will not levy a penalty. However, the catch here is that you will get your mortgaged gold back only after you have paid off your loan completely. In case of personal loans though, banks levy a pre-payment penalty of up to 5% on the outstanding loan amount.
Payment of interest and principal amounts:
The facility to repay only the interest amount and pay the principal at the time of closing your loan is unique to gold loans alone. No other form of loan offers this option. Banks have your gold as security; so as long as you pay the interest each month, they are happy. However, the catch is that if you focus on paying just the interest amount and intend to pay the principal later as lump sum, you will expose yourself to the danger of forfeiting your gold with the bank.
Monthly installments (EMIs):
In the case of personal loans, your EMIs are calculated based on your repayment capacity and credit history. So, people with lower income or poor track record usually end up paying high EMIs or, in worst scenario, are rejected. But with gold loans, you do not have to worry about bad credit history or low income. As they are secured loans, the only factor that plays a role in determining the loan amount is the value of the gold being pledged. Word of caution: don’t take a loan that will be difficult for you to repay!
Loan Disbursal Time:
Disbursal time for a gold loan can be as less as 5 minutes. Since your loan is secured, the banks or NBFCs do not get into a detailed due diligence, which is the norm for a personal loan. As a result their approval and disbursal both take comparatively longer.
Since gold loans are secured loans, minimum documentation is required. All that you need to do is produce a copy of your photo id and an address proof.
Downsides to gold loan:
Essentially, the only downside to a gold loan is the possibility of losing your deposited gold. If you fail to repay your loan in the prescribed manner, you will lose out on your asset. Lending institutions auction the gold to recover their dues, what makes it worse is that you not only lose your gold but do so at a lower price because the loan-to-value (LTV) ratio is 75%.
So, the next time a need arises for you to take a loan, make sure you assess the pros and cons of each option in front of you!