Know How to Choose Between Gold Loan and Personal Loan

Financial emergencies often come uninformed, leaving us in urgent need of funds. Whether it's to fund your sister's wedding or cover a medical emergency, loans can prove to be lifesavers. Among the various types of loans available, personal loans and gold loans are two of the most popular options. But how do you choose between a gold loan and a personal loan? Let's dive into the comparison of gold loan vs personal loan, exploring their interest rates and fundamental differences.

Understanding Gold Loans

What is a Gold Loan?

A gold loan is a type of loan where you pledge your gold assets, such as coins or jewellery as collateral. Typically, lenders offer up to 75%-80% of the gold's value as a loan based on the current market value and quality of the gold. The loan amount is computed using the Loan-to-Value (LTV) ratio. You can repay the gold loan via monthly instalments, and once the loan is cleared, your gold is returned.

Is Gold Loan Secured or Unsecured?

A gold loan is a secured loan because it is offered against collateral—your gold.

Also Read: What is Secured loan

Gold Loan Tax Benefits

Gold loans generally do not offer tax benefits unless the funds are used for home improvement, construction, purchase of residential property, or business expenses. For home improvement, you can avail of a tax deduction under Section 80C of the Income Tax Act, 1961, up to Rs. 1.5 lakhs per year. For residential property purchase/construction, you can claim up to Rs. 2 lakhs per year tax deduction as per the Income Tax Act's Section 24, 1961.

Advantages of Gold Loans

• No Restriction on End Use: Unlike other secured loans, there is no restriction on using the funds from a gold loan.
• Affordable Interest Rates: Most banks and financial institutions offer gold loans at competitive interest rates.
• Quick Approval and Disbursal: The loan approval and disbursal processes are swift and hassle-free.
• No Credit History Required: You do not need a good credit history to get a gold loan.

Disadvantages of Gold Loans

• Risk of Gold Liquidation: If you cannot repay the loan, the lender has the legal right to liquidate your gold to recover the money.
• Variable LTV Ratio: The LTV ratio differs from lender to lender, with a maximum of up to 80% of the gold's value. For instance, if the market value of your gold is Rs. 5 lakhs, you can get a maximum loan of up to Rs. 4 lakhs.

Also Read: Get a Personal Loan of Rs. 5 lakh Online Instantly

Understanding Personal Loans

What is a Personal Loan?

A personal loan is an unsecured loan, meaning you do not have to provide any collateral to get funds. If the lender deems you creditworthy, you are eligible for the loan. Eligibility is based on factors like income, repayment capacity, nature of employment, and credit history.

Advantages of Personal Loans

• No Collateral Required: You can get the loan without providing any security deposit or collateral.
• Lower Interest Rates: Personal loans have significantly lower interest rates compared to other unsecured loans like credit cards.
• Debt Consolidation: Personal loans can be used to consolidate high-interest debts into a single monthly payment.
• Credit Score Improvement: Using personal loans responsibly can help improve your credit score.

Disadvantages of Personal Loans

• Fees and Penalties: Personal loans attract fees and penalties that can increase the cost of borrowing. Processing fees can range from 1% to 6% of the loan amount.
• Credit Score Dependence: Your credit score is heavily influenced by your chances of getting a personal loan at a low interest rate. A poor credit score reduces your chances of getting a personal loan.
• Impact of EMI Defaults: Missing EMI payments on previous loans can make it difficult to get a new personal loan.

Comparing Gold Loan vs. Personal Loan

Interest Rates

• Gold Loans: Generally have lower interest rates(7.7% per annum onwards) because they are secured loans.
• Personal Loans: These loans have higher interest rates(8.50% - 13.60% per annum) as they are unsecured loans.

Processing Time

• Gold Loans: Typically have lower processing time, which may be sanctioned in 90 to 120 min.
• Personal Loans: Usually have higher processing time ranging from 48 months to 84 months.

Eligibility

• Gold Loans: Those applying for gold loans must own the gold ornaments sold by banks.
• Personal Loans: Depend heavily on the applicant's CIBIL score, income, and employment stability.

Loan Amount

• Gold Loans: The loan amount can go up to ₹25 lakhs.
• Personal Loans: The loan amount depends on the applicant's creditworthiness and goes from ₹50,000 to ₹20 lakhs.

How to Make a Choice Between a Gold Loan and a Personal Loan

Choosing between gold and personal loans depends on your specific needs and circumstances.

• Lower Interest Rate Needed: If you need a loan with a lower interest rate and have gold assets to pledge, a gold loan might be the better option.
• No Collateral Available: A personal loan would be more suitable if you don't have collateral and need an unsecured loan.
• Quick Access to Funds: Gold loans are generally processed faster for quick and hassle-free loan approval.
• Credit History: If you have a poor credit score, a gold loan might be easier to obtain than a personal loan.

Final Thoughts

Both gold loans and personal loans have their unique advantages and disadvantages. Your choice should depend on your immediate financial needs, availability of collateral, and creditworthiness. By understanding the key differences and weighing the pros and cons, you can make an informed decision that best suits your financial situation. Happy borrowing!