Personal loan

Gold loan or Personal loan: Check which one is best for you?

After the Covid-afflicted situation, people prefer gold or personal loans which would be the best option to tide over liquidity shortages. However, the borrower needs to evaluate and select the right borrowing instrument to cater to their financial needs. To choose the best it’s important to deeply understand the advantages and disadvantages of gold and personal loan and find the best suit for you. Read on to know more about the characteristics, pros, and cons of gold and personal loan to arrive at the best loan. 

Gold Loan Versus Personal Loans 

Since gold loans are availed against your pledged gold asset, the processing of the gold loans is fast compared to other loan options. So, the money is transferred instantly to your bank account. Under a gold loan, the evaluation process is solely based on the quality of collateral (gold). Here, the know-your-customer process is simple, and there is no importance given to credit score.

But, for a personal loan, the loan is approved and the fund is disbursed based on your credit score and credit history. Here, the documentation is quite different, and it is more than what is required to avail of a gold loan. If you want to get a personal loan, you are required to submit your ITR forms, payslips, and other documents to get your application processed. Furthermore, the verification of the submitted documents involves more time and the disbursement of your loan may take up to 7 days.

Here are a few differences between a gold loan and a personal loan

  • Secured And Unsecured loans

The gold loan is a secured type of loan as you pledge gold as a security or collateral to obtain the loan. The pledged gold can be in any form such as a  gold coin or an ornament. In case you default to repay the gold loan, the lender will take over the collateral (gold) that you pledged to recover the loan. Whereas a personal loan is an unsecured loan where there is no need to pledge any kind of collateral or securities. These loans are also called signature loans where the lender offers you a loan based on your creditworthiness and other qualities like income stability, type of employment, and repayment capability. If you are not ready to pledge your gold as loan security or don’t have gold to provide as collateral, then a personal loan could be a good option. This advantage makes a personal loan quite preferable over a gold loan as many may not be ready to pledge precious gold in bank lockers for a long time. 

  • Repayment Duration

While the tenure of a gold loan is between 3 months to 3 years, the tenure of a personal loan is between one to five years. If you are looking for loans with longer tenure, then it is advisable to go for a personal loan. This way, you can preplan your monthly spending more wisely. Taking a loan with a flexible tenure will aid you to maintain good credit health as you properly manage your monthly expenses. 

  • Interest rates

Be it a gold loan or a personal loan, the interest rate will change from lender to lender. The other aspect that affects the interest rates is the duration of the loan. A longer loan duration results in higher interest rates. This factor is appropriate for both gold loans and personal loans. However, the interest rate of a gold loan is somewhat lower compared to a personal loan interest rate as it is categorized under a secured loan. 

  • Credit score 

As a personal loan is an unsecured loan without any collateral or security, it is required to have a  good credit score of 750 and above to get qualified for a personal loan. When you have a poor credit score, the chance of getting approved is less for a personal loan. However, Some lenders may provide a personal loan for low credit score applicants with higher interest rates. In such a case, the rates will be higher than those applicants with a good score. In such a situation, it is better to go for a gold loan than a personal loan. Because a gold loan is a secured type of loan. So, there is no need for a person to maintain a  good credit score as the lender provides a loan against the amount of gold pledged. 

  • Repayment modes 

The repayment of a personal loan is done through Equated Monthly Installments ( EMI) which have both the principal and interest factors. In the case of gold loans, organizations provide a wider range of repayment methods. Apart from the usual EMI repayment mode of a personal loan, some NBFCs permit you to just repay the interest amount on a monthly basis leaving the principal component to be repaid on the maturity date. Under the Bullet repayment method of a gold loan, you can repay the whole loan amount of both the principal and interest amount at the end of the loan, and there is no need to service EMIs.

  • Income Soundness 

Opting for a personal loan could be problematic if you don’t have a stable source of income or income proof. It may also be quite challenging for self-employed or applicants with limited IT returns. In such cases, many industry experts suggest you choose a gold loan as the credit scores have a lower approach on these loans.

Conclusion

The borrower has to pick between gold or a personal loan as the end decision is solely based on the credit profile and the requirements of the borrower. Personal loans are advisable for people who need small amounts of loans with a good credit score and are not ready to pledge any collateral. Whereas gold loans may mainly suit those who look for flexibility in quantum, loan repayment, or credit profile. It also works for customers with irregular or high cash flow cycles.

 

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