Gold Loans vs Personal Loans: What You Should Know Before Applying

 

Gold loans and personal loans are popular due to a quicker approval process, no end usage restrictions and minimal documentation. Gold loans are secured against your gold ornaments which allows for a quicker disbursal of funds and lower interest rates than personal loans. But for the ones who don’t want to pledge assets and have a strong credit profile, can opt for a personal loan. But the question is: which is better: a gold loan or a personal loan? Knowing the features of each type of loan is important for making an informed decision.

Comparison – Gold Loan vs. Personal Loan

Interest Rates

The interest rates of personal loans are usually higher than gold loans. For instance, SBI offers personal loans @ 10.30% p.a. onwards, while its gold loan rates start at 9.00% p.a. The lender charges lower interest rates on gold loans due to the availability of gold ornaments as collateral, as it reduces the lending risk. The interest rates of personal loans depend on the credit profile of the applicant and the credit pricing models of the lenders.

Processing Fees

The processing fees of a gold loan are usually lower than those of a personal loan. Most banks and NBFCs levy a processing fee of up to 4% of the loan amount, but some waive these charges as part of festive offers. In the case of gold loans, lenders usually charge processing fees of 1% to 2% of the loan amount. For instance, Kotak Mahindra Bank charges 5% processing fees for a personal loan and 2% processing fees for a gold loan.

Turnaround time for loan disbursement

Gold loans are usually approved and processed faster than personal loans. Personal loans through offline channels usually take 2 to 7 business days for disbursal, whereas the disbursal for instant or digital personal loans or pre-approved personal loans can be within a few hours. For instance, HDFC Bank claims to disburse a personal loan to pre-approved applicants within 10 seconds and for regular personal loans, the disbursement can take a minimum 7 working days post submission of all documents. On the other hand, HDFC Bank claims to disburse gold loans within just 45 minutes of application submission.

Loan Amount

Personal loan lenders usually offer loans for up to Rs 40 lakh, while the loan amount for a gold loan is based on the Loan-to-Value (LTV) ratio and the valuation of the gold pledged as collateral. The RBI has set a cap on the LTV ratio at 75%, i.e., applicants cannot avail a loan of more than 75% of their gold value.

Chances of Loan Approval 

As collateral is involved in gold loans, lenders can sell the pledged gold ornaments in case of loan defaults. This allows lenders to take a more relaxed approach while evaluating applications. Thus, prospective applicants unable to get their personal loan application approved or getting at higher interest rates due to their poor credit scores, can consider applying for gold loans. Lenders consider multiple factors, such as credit scores, monthly incomes and occupation profiles to ascertain the eligibility of the applicants as no collateral is involved.

Loan Repayment Tenure

The repayment tenure of gold loans is usually shorter than personal loans. Gold loan lenders offer loans for tenures ranging from 1 to 3 years, with some lenders offering up to 5 years. For personal loans, the tenure ranges from 1 to 5 years and some lenders offer up to 7 years.

How to Choose Between A Gold Loan and a Personal Loan

Choosing between a gold loan and a personal loan depends on the financial requirements and the urgency of immediate cash. Personal loans, being unsecured, are offered at higher rates but with no collateral risk. On the other hand, a gold loan is offered at lower interest rates, but your gold ornament is pledged as collateral. Before applying, check both personal loan and gold offers at online financial marketplaces and check whether the offer suits your financial needs.

Consider charges, not just interest rate

Processing fees, foreclosure charges, etc, are added to the cost of the loan amount and GST of 18% is charged on such fees. Therefore, you should consider charges (not just interest rates) when comparing personal loan and gold loan options for your financial needs.

Opt for tenure that suits your repayment capacity

Longer loan tenures mean higher interest costs but lower EMIs. Shorter tenure means higher EMIs but lower interest cost. You can opt for gold loans if you can comfortably repay higher EMIs within a shorter tenure, given their lower interest costs. Before making an application, consider your repayment capacity and financial goals.

Summing Up

Understanding the key distinction between a gold loan and a personal loan can help you to make more informed decisions about which loan best fits your repayment capacity and financial goals:-