Gold loans and personal loans are two of the most common tools that meet the needs of borrowers, but the two financial instruments are different in terms of interest rates, fees and features.
Deepak Singhal, SVP, Business, Rupeek, says: “Following Covid uncertainties, loans – gold or personal – may be the best route to overcoming liquidity shortages. However, it is important to evaluate and select the right debt instrument to best meet the requirement.
How to decide between the two? Experts say it usually depends on the complexity of the credit against assets and the KYC process.
To begin with, a gold loan is a secured loan in which the borrower pledges their gold – ranging from 18,000 to 24,000 – to a financial institution as collateral and simply avails a loan against this one. On the other hand, personal loans are unsecured loan products, with banks checking the credit rating and history of the loan applicant before authorizing a loan.
Gold loan vs personal loan
Since gold loans are used against gold assets, they have one of the fastest disbursements compared to other loan options, as the money is instantly transferred to the borrower’s account. Singhal says, “The assessment process is mainly based on the quality of the collateral and a simple KYC, with no emphasis on the credit score of the borrower.”
In the case of personal loans, since the approval and disbursement of the loan depends on the credit rating and background of the loan applicant, the documentation needed is more than what is required when looking for gold loans . Borrowers are required to submit their ITR forms, payslips and other documents for their application to be processed. Also, verification of these documents usually takes time and disbursement of personal loans can take up to 7 days.
Availability of security
“If a loan seeker has enough collateral and wants to pledge it to get a loan, a gold loan might be a better option, in terms of lower interest rates,” Singhal says.
That said, although the collateral value is less than the loan requirement, a personal loan might be the option of choice if the borrower qualifies for the loan amount they seek.
Amount of the loan
If the loan requirement is higher, then the pre-disbursement assessment of a personal loan is higher and more thorough. Moreover, in many cases, according to experts, even after sufficient due diligence, the borrower may not get the desired loan amount.
Whereas in the case of a gold loan, the quantum is tied to the quantity of gold, so there is no restriction on the upper limit, if the borrower has collateral and the TAT for disbursement does not increase significantly.
When borrowers have poor credit ratings, they may not qualify for a personal loan. Even if they get one, Singhal points out, “the interest rate will be much higher than those given to applicants with good credit scores. a personal loan.
Availing a personal loan could be complicated if the borrower has no regular source of income or no proof of income. It can also be difficult for the self-employed or people with limited IT returns. In such a case, according to industry experts, a gold loan might work better because credit ratings have less bearing on such loans.
The interest rate varies with each lender, be it gold loans or personal loans. The other factor that affects interest rates is the term of the loan. Singhal says, “The longer the term, the higher the interest rates. This applies to both gold loans and personal loans. However, gold loan rates are relatively lower than personal loan interest rates because it is a secured loan. »
Personal loans are repaid in the form of EMIs, which include both principal and interest. However, gold lending companies offer a wider choice of repayment methods.
Singhal explains, “Apart from the usual repayment mode of EMI, NBFCs allow borrowers to simply repay their interest amount each month, leaving the principal component to be repaid on the due date.”
In the Bullet repayment method of a gold loan, a borrower can repay the full amount of principal and interest amount at the end of the loan term and does not need to deal with EMIs.
The choice between a gold loan and a personal loan will mainly depend on the borrower’s requirements and credit profile.
Singhal adds, “Personal loans will best suit those who need small loan amounts without the effort of collateral, with a good credit history and income documentation.
Gold loans will primarily suit those who require greater flexibility in terms of quantum, repayment or credit profile and are also suitable for clients with irregular or higher cash cycles.