Personal loan or gold loan—How to choose between the two?

Gaurav Aggarwal

With gold continuing as one of the most popular choices for both saving and investment needs among Indian households, gold loans today are a strong alternative to lending products like personal loans. And in the time of need for funds, there is often a dilemma over what to choose – a personal loan or a gold loan. Here’s a comparison which hopefully will help you decide:

Interest rates: Interest rates for personal loans range between 10.99 percent and 24 percent per year, depending on your employer, monthly income, repayment tenure and loan amount.

Interest rates on gold loans range between 12 percent and 24 percent per year depending on the tenure of the loan, loan to value ratio and type of repayment option opted. Usually, the interest rates on gold loans are higher for loans with longer tenures and/or loans with higher loan-to-value (LTV) ratio.

Loan Amount: Banks and NBFCs usually offer personal loans anywhere between Rs 50,000 and Rs 25 lakh. Lenders will sanction the loan amount based on your monthly income, current EMIs, employer, loan tenure and credit score.

Gold loans, however, can range from as little as Rs 1000 to beyond Rs 1 crore. As gold loans are fully secured, your loan amount will primarily depend on the value of the gold to be used as pledge. The RBI though has capped the gold loans from NBFCs and banks at 75 percent of the value of gold pawned. Additionally, regional rural banks are not allowed to lend beyond gold loans of Rs 2 lakh.

Loan Tenure: While personal loans are available for tenures spanning from one year to five years, gold loans are offered for tenures ranging from seven days to four years. While most PSU banks offer gold loan tenures of up to one year, a few private sector banks and NBFCs offer longer tenures of up to four years.

Since longer loan tenure translates into higher interest cost, availing a gold loan would be a cheaper option if you are confident of repaying loan within a year. Opt for a personal loan if your loan amount is too big for you to be repaid within a year.

Processing Time: Gold loans have quicker disbursal process than personal loans. While lenders take two to seven days to disburse personal loans, gold loans are generally disbursed within the same day of loan application. So, those who need funds almost instantly should go for a gold loan.

Convenience: Personal loans are more conveniently available as you can apply for it online and the entire amount will be credited to your bank account, without any need to visit your lender’s branch.

However, for gold loans you need to visit your lender to get the value of the gold evaluated.

Credit Score: Credit score plays a major role during the approval of personal loan applications. An applicant with a low credit score may find it difficult to get his loan application approved.

Since gold loans are fully secured loans, lenders do not give much importance to the applicant’s credit score. However, for really high gold loan amounts that are to be repaid through EMIs, lenders are likely to check the credit score of applicants.

Repayment Options: Personal loans are repaid in the form of EMIs, which include both principal and interest components. Failing to make timely EMI payments attracts late payment charges of up to 24 percent p.a. on the outstanding amount.

However, for gold loans, most lenders offer borrowers an additional repayment option called bullet payment option. Under this, a borrower can either opt to repay both principal and interest components at the end of the loan tenure or repay the interest component during the loan tenure and the principal component at the end of the tenure. This will suit those who may find it difficult to service EMIs during the loan tenure. Thus, self-employed borrowers will find bullet payment option more useful as they may lack uniform cash flows whereas EMI option will suit salaried consumers because of the certainty of their income.

Final word: Although gold loans outscore personal loans because of flexible repayment options and quicker processing time, personal loans might be a cheaper option for salaried professionals employed with reputed organisations and having a good credit profile. On the other hand, for the self-employed who may find it tough to get a personal loan from banks, gold loan is an easy alternative. However, before you make a decision, always compare the loan offers from your banker with offers from other lenders.

(The writer is Associate Director - Unsecured Loans at Paisabazaar.com)