A few financial responsibilities are foreseen, like your child’s education or wedding, and some come up unexpectedly and unannounced, like a medical emergency. Any such situation requires patience and financial aid or assistance. For all such financial contingencies, loans from banks and other financial institutions are lifesavers. Personal and gold loans are two of the most popular credit options available, but choosing between a gold loan and a personal loan is often confusing. The decision between a gold loan vs. a personal loan, which is better for you, depends on many factors, including your needs and preferences.
This article will compare gold loans and personal loans based on key factors like interest rates, terms and conditions, etc., to help you decide the best option.
What Is a Gold Loan?
A gold loan is a loan you can avail of by pledging your gold with a bank or financial institution. The gold can be in jewellery, coins, or bullion. It is a secured loan, as you offer gold as collateral. Generally, lenders offer 70% to 80% of the value of gold as the loan, and the current value of gold is considered for the valuation.
Advantages of Gold Loan
- There is no restriction on the end-use of a gold loan; it can be used for any purpose.
- The interest rates on gold loans are generally affordable
- You can get a gold loan even without a good credit history.
- The EMIs on gold loans are flexible.
- The process of getting a gold loan, as well as its approval and disbursal, is quick.
Disadvantages of Gold Loan
- Many people do not have enough gold to pledge it as collateral to avail of a gold loan.
- If you are unable to repay the loan amount, the lender can sell or liquidate your gold to recover their dues.
- The loan-to-value (LTV) ratio varies from lender to lender, so thorough market research is needed before taking out a gold loan. Also, the maximum loan amount is only 80% of the gold pledged.
What Is a Personal Loan?
A loan that you can get without pledging anything as collateral is a personal loan. Since you do not need to give any collateral or security to the lender, a personal loan is an unsecured loan, so the interest rates are higher for such loans. When comparing a personal loan vs. a gold loan, one of the most significant differences is that a personal loan is an unsecured loan, while a gold loan is a secured one. Lenders sanction personal loans based on eligibility criteria, such as income, stability of income, age, credit score, etc.
Advantages of Personal Loan
- You can avail of a personal loan without any security of collateral
- Personal loans are also not use-specific, so they can be used for any purpose.
- The interest rates on personal loans are lower than those on other unsecured loans, such as credit cards.
- You can use personal loans to consolidate smaller debts by converting all EMIs into a single payment. This helps you save on the high interest rates of the EMIs, too.
Disadvantages of Personal Loan
- Personal loans are unsecured, so the interest rates are higher than those for secured loans.
- You require a good credit score and stable income to get a personal loan at favourable terms.
- Unlike gold loan repayment, personal loans do not have a bullet repayment option.
- If you have missed repaying any previous loan repayment, availing a new personal loan can be difficult.
Difference Between Gold Loan and Personal Loan
If you are unsure about a personal loan vs a gold loan and which is better, remember both offer many benefits to the borrower. The decision will depend on your needs. If you are looking for quick funds and disbursal and do not want to sell your gold, you can put it as collateral and get a gold loan. But if you do not have gold or do not wish to put it as collateral but need a versatile loan, opt for a personal loan.
This table shows the difference between a gold loan and a personal loan to help you decide better:
Gold Loans Vs Personal Loans
| Parameters | Gold Loan | Personal Loan |
|---|---|---|
| Nature of Loan | To get a gold loan, you have to put gold as collateral. So, gold loans are secured loans. | Personal loans do not require security or collateral, so such loans are unsecured. |
| Collateral | Gold loans require gold assets in the form of coins, bullion, or jewellery as collateral. | Personal loans do not need any assets as collateral. |
| Interest Rates | As gold loans are secured, the interest rates are lower. | Due to its unsecured nature, personal loans have higher interest rates. |
| Loan Amount | The amount of loan sanctioned depends on the value of the gold put as collateral. | The amount of personal loan sanctioned will depend on the income and credit score of the applicant. |
| Approval Process | The documentation, approval, and disbursal of a gold loan is faster due to collateral. | It might take longer to get approval for personal loans. |
Gold Loan vs Personal Loan: Which One to Choose and When?
Gold loans vs. personal loans is a big dilemma for most people. When you need funds urgently and at a lower interest rate, take out a gold loan. But you will need gold easily available to put it as collateral. It is suitable for people who want a loan quickly and those with a lower credit score.
If you need funds for various purposes and don’t have any valuable assets to pledge as collateral, choose a personal loan. You will need a stable and regular income to support the repayment of personal loans. This option suits people who want to build credit and manage higher loan amounts.
Deciding between gold loans and personal loans is about more than just getting the funds. You need to make an informed financial decision that will impact your finances and monthly expenses. Choose wisely and be aware of all the different types of loans available in the market and their advantages and disadvantages.
