Gold Loans vs Personal Loans: Which One Works Better?
When you faced with a financial need, the first thing that comes to mind is opting for a loan.
Know all about the low interest rates gold loans or Personal Loan. This article will help you make the right decision.
In India, a majority of the loans that people take out are personal loans. The money from these loans can be used to pay medical bills or help pay for a wedding, or basically anything you need it for. Unfortunately, personal loans generally have a long application process, and the rate of interest is quite high. To take a personal loan, you would have to show your income proof, and even then, the loan might not be sanctioned. Your previous credit score is carefully considered before the amount of loan you can be given is decided. Even if you do get the loan amount that you want, you have to pay it back in fixed Equated Monthly Installments (EMIs), and you do not have the flexibility of repayment in variable amounts.
So, should you opt for a personal loan? Let’s find out.
Have a stable job?
Have a good credit score?
Have no collateral?
Have all your documentation in order?
If your answer to all of the above is a resounding ‘YES!’ then a personal loan could very well be the best loan for you!
Personal Loans are tailor-made for short term financial needs or a sudden financial crunch, but due the high interest rates makes them quite stressful on the pocket.
Sometimes, the financial requirement may be too high what a Personal Loan can offer. Opting for a gold loan can be useful in such cases.
Indians have a unique fascination with gold. Every family, irrespective of their financial situation, has some quantum of gold or gold jewelry in its possession. Gold loans offer immediate liquidity by mortgaging the gold or jewelry without having to sell the jewelry in a financial emergency.
Advantages and Disadvantages of Gold Loan
Gold loans once started off as a popular loan option, have lost their sheen somewhat over the years.
Easy to avail: Gold loans are easy to avail, making them ideal for a financial emergency. Currently, most non-banking financial companies (NFBC) offer loan against gold. The overall loan processing time for a gold loan is quite less and you can get a gold loan approved in less than a couple of hours, making it an almost instant loan.
Availability of flexible schemes: Unlike other loans, gold loans offer various flexible schemes. For example, you can choose to pay only the interest component during your loan tenure and pay the borrowed amount at the end of the tenure, making the loan far more useful and pocket friendly.
Limited repayment woes: In the worst case scenario, if you are not able to repay your gold loan, the bank will take possession of the pledged gold or jewelry to recover its dues. There is no unwanted recovery problem as in case of unsecured loans like Personal Loans or loan against property which is recovered through the sale of the property.
High interest rates: Initially, gold loans were cheaper when compared to other loans like Personal Loans. While Personal Loans come with an interest rate of 15-26% per annum, gold loans were being offered at 12-16% rate of interest per annum. With falling gold prices and RBI seeking NBFCs to maintain a minimum LTV (Loan-To-Value) for the loan, interest rates have increased and are now more or less at par with Personal Loans thereby offsetting the interest rate advantage.
Low LTV and short tenure: The Reserve Bank of India has barred NBFCs from offering loans with a Loan-To-Value ratio exceeding 75%. So, if you are mortgaging a gold jewelry worth Rs. 1 Lakh, you can at best get a loan of only up to Rs. 75,000. Add to it the loan processing fee and other charges thereby reducing the final amount you can get in hand. Gold loans have a maximum tenure of 1 year. So you should be taking a gold loan only if you are sure that you can repay the amount in the short tenure.