Gold Loan VS Personal Loan: Which one is better?

Anyone can face a financial emergency such as sudden medical expenses, marriage, etc. Borrowing money can be a good option in such a scenario. Out of the many borrowing options out there, gold loans and personal loans are worth considering as they help meet the fund requirements quickly.It is, therefore, worthwhile to compare gold loan vs personal loan by knowing them in detail before deciding which one can be better suited for you.

A gold loan is provided against the gold you own. First, you approach a lender and put up your gold assets with the lender. The lender assesses the value of the gold you brought and grants a percentage of that value as the loan amount.You will be paying monthly instalments until you pay off the entire loan amount with interest. The lender will hold your gold during the loan tenure. Once you pay off the debt, the lender will return your gold.

A personal loan is usually offered to a borrower with a good credit record. Such types of loans don’t require the borrower to submit any collateral. You just fill up the loan application form, sign it, and submit it to the lender with the necessary documents.

• Repayment of only the interest amount till maturity and then begin repayment of the loan amount.
• Repayment of interest upfront and pay the principal on the maturity date.

• Rate of Interest A gold loan is a secured loan as you pledge your gold as collateral. On the other hand, personal loans are unsecured loans with no collateral.Therefore, gold loan interest rates can be lower than personal loans as they are less riskier for the lender. Interest rates can also vary on other factors, such as loan amount, loan repayment tenure, etc.
• Loan Amount The loan amount in personal loans can depend upon a combination of factors such as the borrower’s credit score , loan repayment capacity, existing loans, if any, and the loan tenure.Gold loan amounts primarily depend on the value of the gold deposited as collateral. As per RBI rules, a lender can't provide a gold loan exceeding 75% of the gold's value. Therefore, a lender can offer any percentage of gold's value as a loan within the limits prescribed by the RBI.Moreover, the borrower's credit score doesn’t matter much in gold loans as the lender holds the gold assets as securities.
• Loan Tenure Personal loans usually come with long loan tenure ranging from one to five years. Gold loans comparatively have a much shorter loan tenure starting from as little as seven days to three years.Long loan tenures can allow the borrower to pay off the loan after balancing the personal finances gradually. On the other hand, shorter loan tenures can put pressure on the borrower's finances as he/she will have to pay off the loan in larger instalments.
• Loan Repayment Options Both gold and personal loans can provide flexible loan repayment options to the borrowers. A personal loan, for instance, allows the borrower to decide the loan repayment tenure and an agreement is made at the beginning about the EMI amount.But a gold loan can sometimes offer greater flexibility of repayment. The lenders can consider accommodating the borrower’s interest during the loan tenure as they have the guarantee in the form of gold deposits.There can be different repayment options in gold loans, such as
• Processing Fees A personal loan can have processing fees like insurance, service charges, processing charges, etc. However, gold loans can have additional costs with the usual processing fees. These additional fees can be in the form of gold valuation charges, documentation fees, administration charges, etc.You should carefully analyse the processing fees of both loan types to negotiate a good deal.

After comparing gold loan vs personal loan , you would recognise that both have their own set of pros and cons. You can consider a gold loan if

• You are capable of putting a substantial quantity of gold as collateral.
• You are confident of paying off your loan in a short span.

On the contrary, a personal loan can be best suited if

• You have a good credit score.
• You want to pay off your loan with ease over a long period.
• You can get the required loan amount without pledging any gold.

While arranging the adequate fund should always be your priority, consider the above points to get the best deal and plan your finances accordingly.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.