scorecardresearchGold loans vs personal loans: 4 factors that affect your choice

Gold loans vs personal loans: 4 factors that affect your choice

Updated: 16 Mar 2023, 08:25 AM IST

The difference between gold loans and personal loans is far beyond their secured and unsecured nature. There are factors affecting the choice of these loans and why these loans may benefit only some and not all willing borrowers.

Understanding the difference between gold loans and personal loans

Understanding the difference between gold loans and personal loans

Major economies are in turmoil causing people to lose their jobs. The shutting down of major banks is now resulting in contempt for financial services too. Many feel forced to take loans to pay for their expenses or repay their loans. Many borrowers now wonder what kind of loan would suit them best considering how they can choose between gold loans and personal loans.

The price of gold is going up, thus, enabling an increased loan amount for the same collateral. Personal loan interest rates are rising in response to the repo rate hikes. However, the sudden jump in gold prices and personal loan interest rates are not the only things that borrowers must consider before applying for a loan. There are other factors galore that one cannot afford to ignore or miss while deciding between a gold loan and a personal loan.

First, let us understand what a gold loan is? Many people already know about the same, thanks to myriad advertisements by lending companies encouraging interested borrowers to keep their gold as collateral while applying for a loan. Banks and fintech organizations also encourage borrowers to keep their sovereign gold bonds (SGBs) as collateral for the much-needed loan amount. This underscores how the gold loan is actually a secured loan. 

Now compare a personal loan, which is an unsecured loan. This means that you do not need to pledge your property or investments as collateral. Since there is no collateral involved, the interest rates charges are higher than the average. You must, therefore, repay the loan in manageable equated monthly payments (EMIs) during the loan tenure.

Comparing loan interest rates 

Gold loan interest rates when compared to personal loan rates are definitely on the lower end. However, a lot depends on your credit score, which means borrowers with a lower credit score will have a hard time bargaining against high-interest rates. Fintech organizations doling out gold loans, however, do not care much about the credit profile of the borrowers. 

One reason attributed to this fact is the secured nature of the loan. Another factor worth considering is that the price of the yellow metal has gone up over the years, which means that lenders do not have much to lose in case borrowers are unable to repay the loan amount. A good credit profile allows you to take advantage of low-interest rates for both personal and gold loans. On the other hand, if your credit score is low, a gold loan may be a better option.

Accounting for loan tenures 

For how long do you need the loan? Are you looking for a short-term loan or plan to repay the same over a prolonged period? Personal loan terms range between one and five years though some lenders may offer terms of up to seven years. Gold loans typically have terms ranging from a week to three years though some lending companies may offer terms of up to five years. If you need a longer term, a personal loan is a better option. A gold loan is a more economical option if you can pay off the loan sooner, though again a lot depends on whether you are willing to keep the loan as collateral.

Loan amount matters 

It is no surprise that some people may look forward to a larger loan amount to further their business interests while others may look for small amounts to consolidate their myriad loan requirements. Secured loan amounts are high in contrast to unsecured personal loans. If you are looking for a large loan amount, seeking a gold loan may help you in the long run.

Added charges 

Most lenders charge processing fees though they may not outrightly say so. However, if you are particular about the added charges that you must have to pay to secure the loan, it makes sense to compare the processing fees too. Processing fees for personal loans can be as high as three per cent compared to gold loan companies that charge a flat fee of 0.1 to two per cent of the loan amount. Therefore, by comparing the processing fees of two loan options and doing the necessary calculations, you can determine which loan is the cheapest.

Many fintech organizations have come up in the past few years making it easy for one to choose between the different kinds of loans available. So many myths surround personal loans causing many people to misconstrue their efficacy. Similarly, not many people view gold loans favourably without realizing how these loans are secured loans like any other. 

There is an increased propensity to take loans considering how the young generation loves to live their lives on credit. This is evident from the increased number of non-banking financial companies (NBFCs) and online lenders cropping up every year. This apart, banks performing reasonably well on the credit front underscores the need to understand factors affecting the acceptance and rejection of various loan applications. 

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First Published: 16 Mar 2023, 08:25 AM IST