Facing a financial emergency? Should you take a gold loan or personal loan

If you are facing a financial crunch and looking for funding options, personal loans, and gold loans are two options you may consider. Let’s assess both these loans to help you choose the one that best fits your needs.

Gold Loan And Personal Loan

A gold loan is a type of secured loan where borrowers pledge their gold assets such as jewellery or coins as collateral in exchange for a loan from a bank or a non-banking financial company (NBFC).

A personal loan is an unsecured loan that individuals can borrow from banks, or other financial institutions for various personal expenses, such as medical bills, debt consolidation, home renovations, education, or any other purpose. Unlike secured loans, personal loans do not require collateral, which simply means you don’t have to put up assets like your house or car as security for the loan. Instead, the lender evaluates your creditworthiness and income to determine your eligibility and loan terms.

How Do They Differ On Various Aspects?

Loan Amount

The borrowing limit for both loans differ. For gold loans, the amount of the loan is determined based on the value and purity (18K or higher) of the gold provided as collateral. The maximum loan to value (LTV) under a gold loan as per the RBI directive is 75 per cent. The RBI had raised the permissible limit from 75 per cent to 90 per cent during the pandemic. For instance, if you pledge gold worth Rs 1 lakh, you will be offered Rs.75,000 as loan. The loan amount in a case of a personal loan can range from Rs 20,000 to Rs 1 crore. It will be determined after assessing your credit score and repayment capacity.

Loan Tenure

Gold loans are usually given for a shorter duration. It can usually range from 6 months to 48 months. Some lenders may ask you to repay the loan in 24 months while others may give time to 36 months to service the loan. On the other hand, you can take a personal loan for a tenure ranging between 12 months to 72 months or 6 years.

Interest Rate

A gold loan is a secured type of loan as you are required to pledge your gold against the loan amount. Interest rates on gold loans vary from lender to lender and usually range between 9-27 per cent. The interest rate on gold loan is determined after factoring in the LTV ratio, loan tenure, loan amount, and other parameters by the lenders. The interest rate on personal loan ranges between 10.5 per cent p.a. and 24 per cent p.a. You can get a personal loan at a lower interest rate if you have a good credit score.

Foreclosure charges

Foreclosure charges for gold loans can vary from one lender to another, and they may also depend on the specific terms and conditions of the lender. Some lenders may have foreclosure charges. These charges are usually calculated as a percentage of the outstanding loan amount and the period when you want to close. It can range up to 1-2 per cent of the outstanding loan amount.

Foreclosure charges for personal loans can vary widely from one lender to another and may depend on the terms and conditions specified in your loan agreement. Some lenders do not impose any foreclosure charges, allowing borrowers to repay their personal loans ahead of schedule without incurring extra fees. Some lenders may have foreclosure charges if you decide to prepay or close your personal loan before the agreed-upon tenure. These conditions vary from bank to bank. For instance, a popular bank charges 3% of the outstanding loan amount plus applicable taxes if you close a personal loan any time after the payment of the first EMI.

Gold loan vs Personal loan – Which is better?

Both gold and personal are viable financing options in case of an emergency. You should choose between the two by assessing your actual loan requirement. If your loan requirement is higher, a gold loan may not help and you will have to consider other options like a personal loan.

In the case of a gold loan, minimal documentation is required and often involves quick disbursal. A pre-approved personal loan, too, could be availed quickly. Additionally, if you have a poor credit score, you might find it challenging to get a personal loan, and even if you do, the interest rate offered would be much higher than the best-offered rate. The credit score would not affect your gold loan application as they are collateralised against your pledged gold.

Gold loans come with various options, from paying all the interest up-front and then closing the loan with a lump-sum principal repayment to repaying it with monthly installments like a regular loan. Be aware of all the aspects before choosing the one that works best for you.

To make an informed decision, compare various gold loan or personal loan offers to find the lowest interest rates, processing fees, prepayment penalties, etc. It would also help if you had a clear repayment plan in place. You may lose your precious gold if you default on a gold loan. If you default on a personal loan, you can land in a difficult debt situation and your credit score will be impacted badly.

Adhil Shetty is CEO of BankBazaar.com