Gold loans and personal loans are two kinds of financing options that are very convenient when money is required at short notice. Both have their own advantages and disadvantages. In this article, we will be exploring a few points to understand which type is better in the long run.
Indians have always had a special affinity for gold. This is probably why most people opt for personal loans over gold loans, as they feel skeptical about pledging their gold with a bank or company. However, most people are unaware of the fact that the right company with secure processes, approved by the RBI, is fully transparent and keeps your gold totally safe.
The pros and cons of each type of loan:
Gold loan: This is a secured type of loan that is available to people who own physical gold in the form of jewelry. Gold loan is the ideal type of loan that is very convenient for short time money requirements or raising funds. The pros of gold loan are:
Swift processing: The process of availing a gold loan is fast and easy. The banks or NBFCs that lend this loan in place of physical gold is free of complexities and requires only a few basic documents. Usually, the time to lend a gold loan varies between 15 minutes to about 2-3 hours.
Credit history is not required: In the case of gold loans, banks do not care about credit history. Existing loan details, CIBIL score, or other debt obligations is not required. A gold loan is an excellent opportunity to improve credit history.
Low-interest rate: a Gold loan is cheaper than a personal loan as gold is considered a secure commodity. In contrast, personal loans are unsecured and hence have higher interest rates.
Flexible repayment: a Gold loan is the only type of loan which offers flexible options of repayment. No other loan provides this benefit. The three most common repayment options include-
The option to pay off the loan as regular EMI.
Pay only the interest during the loan tenure, and pay off the rest towards the end of the tenure.
There is also an option to pay the loan amount and interest during the end of the loan tenure, without any payments before that.
No prepayment penalty: There are zero penalties for prepayment in case of a gold loan as opposed to a personal loan.
Added benefits: Some gold loan lenders offer additional services to their lenders, such as a discount on various services provided or free bank lockers.
Cons:
High margin: Gold loans are offered up to 75% of the value of your gold. The remaining 25% cannot be monetized and goes towards the bank margin.
Risk of loss: Gold is a secured asset, and is, therefore, always at risk of liquidation, if the loan is not paid on time.
Short tenure: Most lenders provide gold loans for less than 3 years.
Personal loan: This is an unsecured loan that is ideal for short term financial obligations. This loan is more popular as they fulfill people’s urgent financial needs during emergencies.
The pros of personal loan are:
No collateral: As opposed to gold, a personal loan is not considered collateral. This is probably the most significant advantage of personal loans as borrowers don’t need to pledge any asset such as gold or property with the bank.
Versatile: Another benefit of personal loans is its versatility as they can be taken for various reasons such as home renovation, weddings, or family vacations.
Minimal paperwork: Personal loans do not require a lot of paperwork. Basic KYC information documents and proof of income required by the bank is sufficient to avail a personal loan.
Quick disbursement: In most cases, the loan amount is credited into the borrower’s account within 48 hours of the loan approval.
Cons:
Tedious process: Unlike gold loans, personal loans require a lot of thorough inquiry. The credit history of the borrower and several other complexities often don’t permit people to take personal loans. The process of taking the loan may vary from 2 days to 2 weeks
High-interest rate: As these loans are unsecured, banks are always at a higher risk of loss. Hence, interest rates are also higher.
Prepayment penalties: As opposed to gold loans, personal loans do not provide prepayment options up to 1 year after taking the loan.
Therefore, to conclude, both gold loans and personal loans have their own unique merits and demerits. Individuals can benefit from both depending on the requirement and situation.
