All of us are very familiar with the concept of loans and have heard about them from one person or the other. In simple terms, a loan refers to the amount of money that is borrowed in exchange for repaying it sometime later in the future. Consumers are provided with the choice of different types of loans to meet their different needs, two of them being: gold loan and personal loan.
What is a Gold Loan?
As the term suggests, it is a loan taken against gold. The borrower takes money from the lender in the form of a secured loan wherein gold ornaments or coins are pledged as collateral. The borrower gets the collateral back once the principal amount and the scheduled interest rate get repaid on time. With Indians being the biggest consumers of gold after China, gold loans are popular in the subcontinent.
According to the World Gold Council (WGC), from 1987 to 2016, the annual demand for gold in India has increased by 84%. In addition to all this, during the ongoing pandemic situation, there has been a certain spike in the gold loan applications, as small businesses tried to revive themselves during the nationwide lockdown. This type of loan is one of the easiest and fastest ways to secure funds during emergencies.
What is Personal Loan?
Personal loans are the loans that individuals take up to cover up their personal expenses. It can be used for a variety of reasons depending upon the need of the individual taking the loan. It can also be termed as an instalment loan that is a bit different from other available loans in the same section.
The entire arrangement is quite flexible, making users take up the loan. Personal loans can be secured and unsecured, i.e., some can be secured against collateral, while some can be unsecured without any collateral. Since unsecured loans are considered a bit risky by banks and other financial institutions, there is usually a higher rate of interest charged against them.
Gold Loan vs Personal Loan
A Gold loan and a personal loan are both easy and convenient options to fulfil your financial needs. Both have their advantages and disadvantages. Ultimately, it all comes down to the consumer and his/her preferences and needs.
There are several factors to be considered while undertaking any kind of loan. Let us make a quick comparison between gold loan and personal loan based on those factors:
Availability of Collateral
Gold loans require you to submit collateral in the form of gold jewellery, coins etc. So, in situations when you do not have the means to provide collateral, a personal loan would be your best friend in this case.
Processing time
There are certain situations where people are in dire need of cash. Here a gold loan acts as an instant loan as the processing time for the same is 24 to 48 hours. A personal loan, on the other hand, takes about 3 to 7 days to get processed.
Interest Rates
Considering personal loans can be both secured and unsecured, there is a higher rate of interest that the consumer has to pay in comparison to gold loans. Interest rates for personal loans fluctuate between 10.25% to 24%, whereas it is somewhere between 9.5% to 29% for gold loans.
Loan Amount
Personal loan amounts can go up to Rs.75 lakh, whereas gold loans are all dependent on your collateral. The loan amount can go as high as 90% of the value of the collateral.
Tenure
The amount of time that a person can obtain to repay a loan varies from person to person or the lender. While gold loans can be provided to the borrower for anywhere between 1 day to 36 months, personal loans are usually given for a longer duration ranging between 6 months to 72 months.
Credit Scores
While taking a personal loan, an individual’s credit history or credit scores are evaluated before they are granted a loan. Credit scores basically measure the creditworthiness of a person. When it comes to gold loans, the credit history is not scrutinised and the loan can be provided easily without getting into details about a person’s past.
Processing Fees
Gold loans usually do not tend to charge any sort of pre-closure or processing fees from the borrowers. In most cases, personal loans, on the other hand, charge processing fees from the borrowers. It can range from somewhere between 2-3% of the person’s loan amount.
These are some of the factors that an individual should consider and keep in mind while deciding which type of loan to undertake. There is no denying that both gold loans and personal loans are a very popular and convenient way to obtain finance, but when it comes to deciding which one is the best, it totally depends on you. Every borrower has a different past and different reasons for which they may want to avail of a loan. So, what may be better for one person, may not be the same for another. One should consider all benefits and risks and then make a wise decision!
