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Gold Loan Vs Personal Loan - Understanding the Key Differentiating Factors

April 21, 2023

Know the difference between personal and gold loans to make an informed decision.

Nowadays, procuring a loan is so simple that it’s become our go-to solution to save the day in times of crisis when you don't have access to cash or haven't saved money for a rainy day. The difficulty arises when deciding which loan is ideal for you - Gold Loans or Personal Loans

The difficulty arises when deciding which loan is ideal for you.

That's because there are many types of loans today, and understanding the difference between them is important.

If you've to take out a loan urgently, you have two primary options: a gold loan and a personal loan. 

But, before you choose one of these loans, there are many factors to consider when it comes to interest rates, security, charges, etc.

Therefore, it is crucial to know the benefits and drawbacks of both options when choosing between a gold loan and a personal loan so that you can make an informed decision. 

Let's first explore the primary difference between the two types of loans:

The fundamental differences between Gold Loan and Personal Loans 

Gold assets, such as coins, bars, jewelry, etc, can be pledged as security for a gold loan.

The loan's value is based on the gold's actual weight, as determined by the lender. After you pay off your loan, the lender gives back your collateral.

A personal loan is a secured loan wherein you do not need to provide collateral.

It is common practice for lenders to evaluate your eligibility based on your income, occupation, and credit score.

Today, applying for a personal loan is as simple as filling out an internet form.

Key differentiating factors 

There are a few factors that have to be considered before you take out a personal loan or a gold loan.

Understanding them better can help you make a more informed decision. Here are some of the key differentiating factors:

1. Loan Amount 

While financial institutions provide significant personal loan amounts, they almost always have a maximum allowable limit, over which borrowers are not permitted to borrow money.

When it comes to gold loans, there isn't a predetermined maximum amount that a borrower can be given. 

However, according to the Reserve Bank of India, a lender is only allowed to grant a loan for up to 75% of the gold's worth based on its current market price.

2. Repayment

Personal loans must be repaid in Equated Monthly Installments (EMIs), which include both the principal and interest portions of the loan.

However, when you use a gold loan you get different alternatives for repayment.

You either have the option of paying simply the loan's interest component over the loan period, or you can pay the total interest amount when the loan is disbursed.

Alternatively, you can repay the principal amount in either scenario when the loan ends.

3. Loan tenure

Depending on the lender, personal loan payback terms can range from three to five years. In comparison, you have only three years to repay the gold loan you took.

If you cannot repay the loan within the allotted time, you should inquire with your lender about any gold loan extension programs that may be available.

4. Documents and time to process 

When applying for a personal loan, borrowers are not obliged to offer any collateral; however, when applying for a gold loan, gold holdings can be used as collateral, and the loan would still be accepted. 

People having trouble making ends meet may often ask for personal or gold loans since the lenders can process these applications very rapidly.

However, in addition to the application for the loan, they are required to produce the necessary paperwork, such as documentation of their income and residence, among other things. 

Gold loans are more effective in disbursing funds than personal loans, even though the application procedure for gold loans is time-consuming.

Most lending institutions will review the applicant's income verification paperwork to see whether they meet their requirements.

Consequently, they keep the processing fees for personal loans to a minimum. 

Processing fees for personal loans can be anywhere from half a percent to one percent of the total amount borrowed.

This figure does not take into account the expenses of processing.

When applying for a gold loan, borrowers are not required to present paperwork proving their income because they are utilizing their gold assets as security for the loan.

This is in contrast to most other types of loans.

5. Flexible Repayment Options 

The borrower will be able to circumvent the majority of the restrictions placed on their ability to repay the loan by opting for an EMI payment plan with either a personal or a gold loan.

In contrast to personal loans, gold loans typically come with a wider variety of flexible repayment options. 

Since secure loans guarantee you will make payments on time, they are more flexible to their customers.

Gold loan borrowers have many different options for making their repayments. 

Borrowers of a gold loan need to select the regular EMI payment option to satisfy the terms of the loan's repayment.

They also have the option of repaying the interest accrued during the loan period and making the payment on the principal amount at the end of the term of the mandate. 

At the end of the repayment period, borrowers can make a single payment that covers both the principal and the interest accrued on loan.

You have a better chance of repaying off your debt if you take out a gold loan since these loans provide alternatives to improve your capacity to make repayments.

So, which one's better? 

Gold has a significant role in the practices, rituals, and traditions of Indian society.

Given that it rises in value over time and can be quickly turned into cash, it is an excellent option for use as a wedding present.

This inheritance can be handed down from one generation to the next as a safe investment and a safety net in case of unexpected events.

The majority of homes in India are reportedly owners of some kind or another of actual gold. 

Is a loan secured by gold a better option for you than a personal loan?

You can submit an application for a gold loan if you have gold assets and a pressing need for cash simultaneously.

Personal loans are your best option regarding greater loan amounts and longer payback periods.

Personal loans are ideal when you need money quickly but don't want to be tied down to making payments for a short period or a large sum.

You might consider applying for a personal loan if you have a consistent income and a strong credit history.

However, both of these loans have their share of advantages and disadvantages.

Therefore, it is essential that you evaluate your circumstances and have a solid understanding of the distinctions between a personal loan and a gold loan.

To conclude 

Which loan option is best for you will depend on several factors, including how much money you need, how long you need to pay it back, and how comfortable you are mortgaging gold as collateral.

No matter what you need money for, a Gold Loan or a Personal Loan will assist you. Instant Personal Loans are a viable option since they may provide access to your funds in as little as 24 hours.