Imagine you are in the middle of the month, and some unforeseen medical expenses show up. Imagine having to shift to a new home in an unplanned way for uncertain reasons. Or finding yourself in an urgent need to buy a car or gold. This is that time when you look around to find some way to get the required money. The best way to tide over such situations is to apply for a loan. There are different types of loans available in the market, but today, we will discuss a gold loan and a personal loan. With them being the two most popular options, we will help you figure out which one is better- a gold loan or a personal loan, according to different individuals and needs.
What is a Gold Loan?
In simple terms, a Gold loan is a loan that you get against your gold. It is a secured loan wherein individuals borrow money by keeping their gold (within a range of 18-24 carats) as collateral. The lender decides the loan amount based on the gold’s value. Generally, the loan amount provided is a certain percentage of the gold (e.g., upto 80%) based on the current market value and quality of gold.
A gold loan is very similar to a personal loan, as it comes with minimum documentation for loan application, low rate of interest, flexibility of loan usage, etc. The main point about choosing a gold loan is that it is the perfect solution for raising capital from an idle asset to meet urgent financial needs.
Interest Rates and Processing Fees Involved in Gold Loans
Although interest rates for gold loans vary from person to person, typically ranging between 9.24% and 17%. A nominal processing fee of 1-3% of the loan amount is also charged by some lenders. One must carefully check and compare the interest rate, processing fee, late payment charges and pre-payment charges with the lender before going for the loan.
Documents Required to Process a Gold Loan:
If you are seeking a gold loan, you may need the following general documents:
- Passport Size Photographs
- Identity proof (PAN Card, Voter’s ID, Aadhar Card etc.)
- Address proof (Passport, Driver’s License, Electricity Bill etc.)
What is a Personal Loan?
In simple terms, a personal loan is a loan that covers personal expenses. This type of loan allows you to borrow an amount that can be used to pay for personal usage like moving expenses, medical bills, wedding or leisure expenses, unexpected expenses, etc. Generally, personal loans can be used for any personal expenditure, but some lenders restrict the usage of personal loans. For e.g., some lenders might not let you pay a course fee or any education fee.
With a personal loan, there is a fixed end date by which your loan must be paid off completely. Stashfin offers a line of credit facility for loans, wherein the borrower gets to choose flexible EMIs and loan tenure from 3-36 months.
Fees Involved in Personal Loans
A personal loan can include fees such as origination fees, which are added to the total cost of the loan. It might also include documentation fees or late fees. The total fees differ from lender to lender, but it is advised to carefully understand the fees your lender charges before applying for the loan.
Key Differences Between Gold Loans and Personal Loans
| Feature | Gold Loan | Personal Loan |
| Definition | A loan secured against gold jewellery. | An unsecured loan that doesn’t require collateral. |
| Interest Rate | Generally lower, as gold acts as collateral. | Generally higher, as there is no collateral. |
| Loan Amount | The value of the gold decides the loan amount. It is usually smaller. | It can be larger, but the loan amount depends on your creditworthiness. |
| Loan Tenure | Shorter, typically a few months to a year. | Longer, ranging from a year to several years. |
| Eligibility | It is easier to qualify, as it is primarily based on the value of the gold. | The borrower requires a good credit score, stable income, and other financial documents. |
| Repayment | Flexible repayment options, including part payments. | Fixed monthly instalments (EMIs). |
| Risk | If you default, the lender can seize your gold. | Defaulting can damage your credit score. |
Pros and Cons of Gold Loans and Personal Loans
Although there is no fixed answer to the doubt that a gold loan or personal loan is better, the answer is situational. Let us give you a clear idea of the advantages and disadvantages of both types of loans. This can surely help you decide if a gold loan is better than a personal loan for you or not.
PROS OF GOLD LOAN:
- The loan approval and disbursal processes are quick and hassle-free.
- Unlike other secured loans, there is no restriction on the end use of gold loans.
- You can get gold loans at affordable interest rates.
- You do not need a good credit history to get a gold loan.
CONS OF GOLD LOAN:
- If you are unable to repay the loan, the lender has the legal right to seize the pledged gold and can liquidate your gold and recover his money.
- When you apply for a gold loan, the LTV ratio varies from lender to lender. The maximum amount that you can get is up to 80% of the value of the collateral gold. For instance, if the market value of your gold is Rs. 5 lakhs, you can get a maximum loan of up to Rs. 4 lakhs.
NOTE: LTV ratio is a loan-to-value ratio that refers to the maximum loan amount that can be availed against the value of the gold being used as collateral. The LTV ratio helps in deciding the price of gold loans.
PROS OF PERSONAL LOAN:
- Personal loans come at low interest rates as compared to other unsecured loans like credit cards.
- You can borrow larger amounts than gold loans. So, you can also consolidate your smaller high-interest debts by combining all outstanding payments into a single monthly payment with the help of personal loans.
- Timely repayments on a personal loan can boost your credit score.
- You can get the loan without any collateral, thus making it a less risky form of financing.
- Personal loans come with flexible repayment tenures to suit individual needs.
CONS OF PERSONAL LOAN:
- A personal loan comes with fees and penalties that can increase the cost of borrowing. However, this depends on the lender, but there may also be a processing fee ranging between 1% to 6% of the loan amount.
- If you have a poor or low credit score, you may not be eligible for a personal loan.
- If you have missed paying your Equated Monthly Instalments (EMI) on a previous lending product, it may be problematic for you to get the loan.
- The approval process might get a little complex and longer.
Gold Loans vs Personal Loans: Risks and Considerations
We often keep enquiring about whether a gold loan is better than a personal loan, and there has been a frequent comparison of gold loan vs personal loan interest rates. But the best answer depends on your specific financial situation and needs. Let us help you weigh the risks and considerations associated with both types of loans:
Gold Loans: Risks and Considerations
- If you default on the loan EMI, the lender can liquidate the gold kept as collateral.
- The valuation of gold may vary, which might impact the loan amount you receive.
Personal Loan: Risk and Considerations
- If you default on the loan EMI, your credit score can be ruined.
- Lenders of personal loans have strict eligibility criteria, like a good CIBIL score and a stable source of income.
- This type of loan comes at a higher interest rate than gold loans.
Gold Loans vs Personal Loans: Which is Better for Your Needs?
Gold loan or personal loan, which is better- it is always debatable. Gold loans are secured loans and thus come at low interest rates. However, personal loans are unsecured loans, thus attracting processing fees and higher interest rates. However, if you do not have a CIBIL score >750, then you should apply for a gold loan in case of an emergency. With a good credit score and a stable income, personal loans come easily.
Bottom line
Stashfin helps people deal with such financial contingencies in the quickest way possible. With a credit line ranging from ₹1,000 to ₹5,00,000, you get interest rates ranging from 11.99% – 59.99% APR (Annual Percentage Rate); however, rates may vary from case to case. The best part of getting a personal loan from Stashfin is that you pay interest only on the funds you use.
Frequently Asked Questions
1. Do gold loans have lower interest rates than personal loans?
Yes, gold loans generally have lower interest rates than personal loans. This is because gold loans are secured loans, but you are pledging your gold jewellery as collateral. This helps lenders gain trust, and they offer lower interest rates.
2. Are gold loans easier to get than personal loans?
In the tug of war between gold loans vs personal loans which is better, gold loans do come with the advantage of their ease of availability. This is because gold loans are secured loans, and the lenders are more willing to lend money against a tangible asset like gold, as it reduces their risk.
3. Will taking a gold loan affect my credit score?
No. Since a gold loan is a secured loan, it doesn’t involve a credit check. Therefore, your credit history and score don’t play any role in the approval process. But if you default on an EMI, it might negatively impact your credit score.
4. How quickly can I get a gold loan versus a personal loan?
You put your tangible asset, i.e. gold on the table, the lender evaluates it and issues the loan. However, in case of a personal loan, the lender carefully inspects your credit history and source of income before lending a personal loan. So, yes, gold loans are secured and quicker.
