Personal Loan vs Gold Loan
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Personal Loan vs Gold Loan
Gold loans and personal loans have increasingly become the go-to options for emergency cash infusions. The reasons are clear – they are easy to get, their loan disbursal is quick, and there are no restrictions on how you use the loan proceeds. Although credit scores are checked during gold and personal loan applications to assess the creditworthiness of the borrower, they are not the only factor that is considered for loan approvals, unlike most high-profile loans.
Let’s understand the basics of gold loans and personal loans. Later, we’ll differentiate between the features of both these loans to figure out the best option for your financial needs. So, let’s get started.
What is a gold loan?
A gold loan is a secured loan, where you need to put up your gold assets as collateral. A certain percentage (not more than 75%) of the gold’s value is given to you as a loan. You have various options to repay the gold loan (see repayment options below). Once the loan is paid off, the lender returns the deposited gold back to you.
What is a personal loan?
A personal loan is an unsecured loan. This means you do not need to put up any asset as collateral. Since it’s a collateral-free loan, the interest rate is likely to be on the higher side. You need to repay the loan in easy monthly EMIs throughout the tenure of the loan.
Gold Loan vs Personal Loan
Is a gold loan better than a personal loan? Or is it the other way around? Let’s analyze these two loan options to figure out the best option for you:
Interest Rates
The interest rate of personal loans is in the range of 8.45% to 26% per annum. The interest rate on gold loans is in the range of 7.25% to 29% per annum. If you have a good credit profile, you can enjoy lower interest rates on both gold and personal loans. That said, a gold loan may prove to be a better option if your credit profile is poor.
Loan Tenure
The personal loan tenure ranges from 1 to 5 five years. Some lenders may offer tenure of up to 7 years. For gold loans, the tenure is usually in the range of 7 days to 3 years. Some lenders may offer tenure of up to 5 years. If you want longer tenures, a personal loan is a better choice. And if you can pay off the loan faster (within 1 or 2 years), a gold loan can be a more cost-effective option.
Loan Amount
The personal loan amount usually ranges from ₹50,000 and ₹20 Lakh. Some lenders can also offer a higher loan amount of up to ₹40 Lakh, depending on the loan tenure and your repayment capacity.
Since a gold loan is a secured loan, the loan amount depends on the value of the gold deposited as collateral. Usually, 75% of the gold’s value is sanctioned as the loan amount.
Repayment Options
Personal loan repayment is made in the form of monthly EMIs (interest + principal) spread across the loan tenure. On the other hand, the gold loan offers various repayment options, including EMIs. For example, a gold loan borrower can choose to just service the interest component each month, leaving the principal to be paid off at maturity. Another option is to pay the interest amount up front when the loan is disbursed and the principal to be paid at the end of the loan tenure. If you have repayment constraints due to short-term cash flow fluctuations, a non-EMI repayment option might not be a good idea.
Processing Time
Since personal loan applicants need to submit documents such as payslips/ITR forms and other required documents, it may take 2 to 7 days for the documents to be verified and loan applications to be processed. However, new-age fintech lenders can process a personal loan application with a faster turnaround time.
In the case of a gold loan, the lender checks the authenticity of the pledged gold to figure out the loan amount eligibility. A credit score might not come into the picture at all. This saves time, and the loan is sanctioned in the shortest time possible.
Processing Fee
Processing fees for personal loans can go up to 3% of the loan amount. For gold loans, lenders might charge a processing fee of 0.10% to 2% of the loan amount or a flat price, which can be as low as ₹10. So compare the processing fee of both loan options, do the math, and choose the cheapest loan by figuring out the actual cost of getting a loan.
Gold loan vs personal loan? Which is better? Ideally, if you have a good credit profile and need a larger loan amount for a longer tenure, a personal loan is a more suitable choice. On the other hand, gold loans are better suited for people with poor credit scores that make it difficult for them to qualify for other loans or those needing more flexibility in repayment. That said, the best option for you will depend on your needs and profile.
Final Word
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