Why are personal loans and gold loans popular? Quick disbursal and no restriction on the end-use of loan proceeds. Apart from having adequate gold ornaments and jewellery as collateral, the decision to choose between these two options would primarily depend on how the varying features of gold loans and personal loans suit their borrowers. The question is: which of the two is better: a gold loan or a personal loan?
Chances of loan approval
The absence of collateral in personal loans leads lenders to take a cautious approach while evaluating personal loan applicants. Lenders consider multiple factors, such as credit scores, monthly incomes, occupation profiles, and employer profiles, among others, of the applicants to evaluate their creditworthiness.
As gold loans are fully secured loans, backed by adequate collateral, lenders can sell the pledged gold ornaments in case of loan defaults. This allows lenders to take a more relaxed approach while evaluating gold loan applicants. Thus, individuals unable to avail of personal loans due to their poor credit scores and/or credit profiles can consider availing of gold loans.
Interest rates
Personal loan interest rates usually start at 10.5 percent per annum, depending on the applicant’s credit profile and the credit pricing policies of the lenders. However, some public sector banks may offer personal loans at lower interest rates. The interest rates of gold loans can vary widely depending on the loan tenure, loan amount, and repayment option opted for.
While the difference in interest rates between gold loans and personal loans may not be much for applicants with good credit profiles, gold loan interest rates usually tend to be lower than personal loans for those with poor credit profiles. The availability of gold ornaments as collateral reduces the credit risk for the lender, which allows them to charge lower interest rates than personal loans.
Loan amount
Personal loan amounts usually range between Rs 50,000 and Rs 15 lakh, with some lenders claiming to disburse higher loan amounts of around Rs 30-40 lakh. However, the maximum loan amount that an individual can avail of would primarily depend on the applicant’s repayment capacity and the loan tenure chosen by him.
In the case of gold loans, the loan amount would primarily depend on the valuation of the gold deposited as collateral and the loan-to-value (LTV) ratio set by the lender. However, the gold loan LTV ratio cannot exceed 75 percent due to the regulatory cap imposed by the RBI.
Also read: How to choose between personal loans and credit cards for urgent needs
Loan tenure
Personal loan tenures usually range between one and five years, with some lenders offering maximum tenures of up to seven to eight years. The repayment tenures of gold loans are usually on the shorter side, with most lenders offering maximum tenures of three years. However, some gold loan lenders offer slightly longer tenures of up to four to five years.
As shorter repayment tenures lead to lower interest costs but higher equated monthly instalments (EMIs), applicants having adequate repayment capacity to pay off their loans within shorter time horizons should opt for gold loans. On the other hand, applicants requiring longer tenures due to larger loan amounts and/or lower repayment capacity should prefer personal loans.
Turnaround time for loan disbursal
Gold loans have one of the quickest turnaround times for loan disbursals. Lenders usually disburse gold loans within a few hours of making the loan application. Lenders evaluate gold loan applicants primarily based on the quality of their collateral. Unlike personal loans, lenders do not place much emphasis on the applicant’s credit profile during the loan evaluation process, which allows them to offer faster turnaround times.
In the case of personal loans, most lenders usually take two to seven working days to disburse personal loans. However, with banks and non-banking finance companies (NBFCs) increasingly adopting 100 percent digital loan evaluation and onboarding processes, the processing and disbursal of personal loans, especially those applied through online channels, have become quicker. Many lenders also offer pre-approved personal loans, with same-day or instant loan disbursal, to their select existing customers possessing good credit profiles.
Also read: Is waiting to clear off loans before investing correct?
Repayment options
Lenders offer a wider choice of repayment modes in the case of gold loans. Apart from the usual EMI mode, many lenders allow their gold loan borrowers the option to service their interest component every month while allowing the principal component to be repaid on the loan maturity date.
Some lenders also allow their borrowers to repay the interest component upfront at the time of loan disbursal while leaving the principal amount to be paid at the end of the loan tenure. Additionally, some gold loan lenders allow the flexibility of repaying both interest and principal components at the end of the loan tenure. These non-EMI-based repayment options in gold loans would suit applicants seeking repayment flexibility and those requiring funds to manage their short-term cash flow mismatches.
Personal loans are usually repaid in the form of EMIs, which include both the principal and interest components. However, many lenders have started offering personal loans in the form of overdraft facilities, wherein a credit limit is sanctioned to the borrowers. Borrowers have to service the interest component every month and can repay the principal component as per their fund availability. Moreover, the borrower can make multiple withdrawals and deposits as per their cash flows. The interest cost is charged on the basis of the limit utilised and not on the sanctioned limit. Thus, borrowers seeking greater repayment flexibility can also consider personal loan overdraft facilities as an alternative to gold loans.
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