When one needs money in an emergency, a personal loan comes in handy and is often the first consideration. A personal loan is an unsecured loan, so it comes with a high-interest rate. The rate ranges from 11-24 per cent and depends on factors like the borrower’s credit score, making it costly. However, a gold loan can also be useful during a financial emergency. The lender provides the loan against gold taken as collateral. Let us look at the pros and cons of each loan.
Collateral: As mentioned before, a personal loan requires no collateral. On the other hand, a gold loan requires gold as collateral. Hence, you can get a gold loan if you have gold jewellery or other forms of physical gold. “Because a gold loan is secured, the loan amount is based on the value of the gold you deposit as collateral. NBFCs (Non-banking financial companies) can only lend up to 60 per cent LTV (loan-to-value ratio) at the moment, but banks can lend up to 75 per cent LTV,” says Renisha Chainani, head of research at Augmont Gold For All. Also, since it is a loan against security, banks will not check your credit score for a gold loan. Also, there is no minimum income requirement.
Interest Rates: Since it is a secured loan, gold loans have lower interest rates than personal loans. “Because the interest rate on a gold loan is decided by the lender's risk assessment, it can range between seven per cent and 25 per cent per annum. LTV ratio, loan tenure, loan amount, and other parameters are used by lenders to establish the interest rate on gold loans,” says Chainani. “Because both banks and non-bank financial institutions (NBFCs) provide gold loans, it's important to examine their rates, eligibility restrictions, and loan amounts. Most banks, for example, impose a valuation and processing fee of one to two per cent of the loan amount, whereas NBFCs do not,” adds Chainani.
As mentioned, personal loans have a higher rate of interest. But with a good credit score, you can get a personal loan at a lower interest rate. It is recommended to compare personal loans offered by different lenders before going for a personal loan.
Borrowing Limit: Depending on one's repayment capacity, one can get a personal loan of up to Rs 25 lakh or more. As mentioned before, the value of the gold loan will depend on the amount of loan you can keep as collateral. So, if you need a loan of a higher amount, you would need to go for a personal loan.
Hence, if you have gold, then going for a gold loan makes sense as you pay a lower interest rate. Otherwise, you have no option but to go for a personal loan.
Repayment Tenure: Unlike gold loans, personal loans provide a more extended period for repayment. The duration for repaying a personal loan can vary, extending up to seven years, whereas gold loans typically have a shorter repayment tenure, usually limited to three years.
According to experts, unlike personal loans, gold loans offer flexible repayment options, giving you the convenience to choose how you want to repay the loan. You can opt for a single one-shot repayment or a monthly interest payment with the principal repayment at the time of loan closure. This flexibility allows you to tailor the repayment method according to your preferences and financial situation.
Prepayment: Some lenders may not impose foreclosure charges on gold loans, while others may apply a percentage-based fee on the outstanding principal amount. Borrowers need to inquire about the specific foreclosure policies of their lender before deciding to foreclose the loan. Getting in touch with the lender to understand the procedure and associated charges for foreclosure is a prudent step before proceeding with early loan repayment. Typically, personal loan foreclosure charges range from three per cent to six per cent of the outstanding loan amount. The exact amount of foreclosure charges can vary based on the lender and the specific terms outlined in your loan agreement.
Disbursal Time: Gold loans are known for their swift processing, often getting disbursed within hours of applying. On the other hand, personal loans usually take longer, with the disbursal process typically ranging from five to seven days.
Processing Fees: Gold loans typically come with a processing fee of up to two per cent of the loan amount. On the other hand, the processing fee can vary for personal loans, ranging between one per cent and three per cent of the loan amount.
In Case Of Default: In the case of gold loans, in the event of a default, the lender reserves the right to auction the gold pledged as collateral for the loan. The gold, acting as collateral, can be sold by the lender to recover any losses incurred due to the default on the gold loan. Before proceeding with the auction, the lender will also inform the borrower at least two weeks in advance, providing them with prior notice about the impending auction.
When a borrower defaults on a loan by missing one or more payments, the lender usually follows a notification process to remind and prompt the borrower to make the payments. This process typically begins after the first or second missed payment. To facilitate this process, the lender often employs a designated agent or collection team to contact the borrower.
The designated agent may contact the borrower through phone calls, text messages, or emails, urging them to fulfil their payment obligations. They may also send written notices through the mail to formalize the communication. The primary goal of this notification process is to remind the borrower about the outstanding dues and the importance of timely repayment. In some cases, the lender may also offer assistance or discuss alternative repayment arrangements if the borrower is facing financial difficulties in the hope of finding a mutually agreeable solution.
However, if the borrower neglects the repayment repeatedly, the lender may escalate the collection efforts, including legal action or other measures allowed by the law.
