Personal Loan Vs Gold Loan: An Analysis
Meaning of Personal Loan and Gold Loan – A personal loan is the credit that is given to you after analyzing your credit worthiness. There is no restriction on the usage of the credit advanced to you and can be used for any purpose like, for paying of other debts, marriage, for some urgent purchases or maybe holidays. It is, in a way, an unsecured loan and does not require any collateral security.
Gold Loan, on the other hand, is a secured loan that is advanced to you and gold in physical form is kept as collateral security. Loan against gold is gaining momentum as it caters efficiently to the needs of cash that may suddenly crop up in your life.
Personal Loan or Gold Loan: Which One is Better?
Gold has always played a vital role in the lives of women and especially Indians. The beautiful, marvelous, exquisite and magnificent ornaments made from the yellow metal glorify the beauty of women and also adds to the glitter of festivals and celebrations.
In recent times loan against gold has also gained popularity. Now gold is not just glorifying the beauty of women and occasions but is also serving a means to meet urgent ends. This means that if you are in need of liquid cash and are not able to crack means to meet the urgent financial requirement then gold ornaments and gold in physical form may come to your rescue.
On the other hand, personal loans have always been a source of steady cash especially for salaried individuals who seek to meet their small unfulfilled dreams with the easy cash that they obtain via personal loan with low EMIs and less burden.
The following analysis will help you in comparing personal loan with gold loan thus, enabling you to decide what will help you in your hour of tide. Take a look –
1. Kind of Loan - When we talk of gold loan it goes without saying that it is a secured loan. When you opt for gold loan you ought to provide the banks or the lender with gold jewelry, ornaments, gold biscuits or gold slabs as collateral security and the loan amount that is advanced to you forms the basis of the security given by you.
On the other hand a personal loan is usually an unsecured loan. The amount of loan that is advanced to you is on the basis of your flow of income, your credit worthiness and credit history. A personal loan can be a secured loan in case where the bank or financial institutes doubt the credit worthiness of the borrower or they find that the credit history has had missed payments or the credit score does not speak favorably for the borrower.
2. Loan Amount – Talking about the loan amount that you can get against gold - that would range somewhere from Rs 5K to Rs 25Lacs. While you opt for loan against gold, you will be able to receive approximately 80% to 90% as loan amount. This would be when you opt to take gold loan from a bank and if you opt for non-banking finance company then the percentage would fall somewhere around 60%.
Personal loans are also advanced at the same percentage with a slight difference. When you plan to opt for a personal loan and you already have few running debts in your name then your eligibility for the same will be affected. For example – You earn Rs 45K per month and you have a an EMI for Rs 15K in your name then the amount of personal loan that may get sanctioned to you would approximately be Rs 2 Lacs. If, in case, you do not have any outstanding debts in your name then you may qualify for a personal loan of Rs 4 Lacs approximately.
Your outstanding debts do not play any significant role in the amount that will be advanced to you when it comes to loan against gold as it is a secured loan.
3. Duration of Loan – Gold loans are available for a span of 2 weeks to 2 years but that varies from bank to bank or lender to lender. In case of loan against gold you may apply for extension of tenure once it lapses after paying a small fee for the same.
Personal loans are available from a span of 12 months to 60 months depending on the amount borrowed.
4. Rate of Interest – When you opt for a loan against gold you end up paying interest that ranges from 14% to 24% varying from bank to bank or financial or non-financial institution. Generally, majority of lenders prefer giving gold loans at an average interest rate of 15%.
When you opt for a personal loan you end up paying interest that ranges from 15% to 28% varying from bank to bank. Generally, majority of lenders prefer giving personal loans at an average interest rate of 18%.
5. Processing Fees – You end up paying a processing fee of 1.5% when you plan to lay your hand on gold loan whereas you pay around 2% processing fee when you plan to take up a personal loan.
6. Pre-Payment Charges– If you have a loan against gold and wish to prepay it, you can jolly well do so without giving it a second thought as lenders will not ask you to pay prepayment charges.
Whereas, if you wish to prepay the personal loan in your name then be prepared to pay pre-payment charges for the same. Generally, banks and other financial institutions have clauses prohibiting you to prepay the personal loan in your name for the initial 6 months or for 1 year. The prepayment charges may vary from bank to bank ranging from 2% to 4% of the outstanding amount.
7. Procedure – In the gold loan the procedure seems to be more convenient and simpler as compared to that of a personal loan. As loan against gold is a secured one producing an income proof is not mandatory in this case whereas without income proof you cannot even think of applying for a personal loan. The whole process of availing a gold loan may take around 15 minutes to 30 minutes approximately with very necessary documentation like id proof, address proof etc.
Gaining a personal loan requires a more extensive approach. You need to submit documents like identity proof, address proof, income proof, copy of income tax return etc. the process may take at least 2-3 days approximately.
8. Equated Monthly Installments (EMIs) – It goes without saying that once your personal loan is disbursed, you start paying a fixed amount inclusive of interest from the following month against the credit that you have taken in your name.
In the gold loan, you do not pay EMIs of principal amount monthly but go on paying only the interest that gets accrued. The lenders are not much worried for the principal amount as the amount that they have advanced to you as credit is less than the valuation of the gold that they have kept as security with them.
However, it is advised that you should always pay the credit that you have borrowed monthly along with the principal amount and interest so that you can gain back the possession of your gold as soon as possible.
You should also remember that when you opt for a gold loan there is always a possibility that the lender may ask you to give some extra gold or part pay the amount advanced to you in case if the prices of gold fall after the credit has been advanced to you. While in personal loan you need not have to face any such situation.
Be it personal loan or gold loan, only you can be a better judge in deciding what will suffice your financial needs. Loan against gold comes handy when you have some sudden financial requirement that needs to be addressed immediately.
With gold prices witnessing a steep rise obviously the value of gold in your vaults has increased too but not each of us is blessed with means to fill the vaults with the precious metal and at that time personal loan may become your ideal choice.
Contributed By: Megha Sharma
Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance.