Gold loans and personal loans are two of the most prevalent tools that take care of borrowers’ needs, but both financial instruments are different in terms of interest rates, charges, and features.
Deepak Singhal, SVP, Business, Rupeek, says, “Following Covid-afflicted uncertainties, loans – gold or personal – may be the best path to overcome liquidity shortages. However, it is important that one evaluates and selects the right borrowing instrument to best meet the requirement.”
How should one decide between the two? Experts say, it usually depends on the complexity of credit against assets and the KYC process.
To begin with, a gold loan is a secured loan wherein the borrower pledges his gold – ranging from 18K to 24K – with a financial institution as security and simply avails loan against it. On the other hand, personal loans are unsecured loan products, with the banks checking the credit score and history of the loan applicant before sanctioning a loan.
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Gold loan vs personal loan
Since gold loans are availed against gold assets, they have one of the fastest disbursals vs other loan options as the money is instantly transferred to the borrower’s account. Singhal says, “The evaluation process is mainly based on the quality of the collateral and a simple KYC, without any emphasis on the borrower’s credit score.”
In the case of personal loans, since the loan approval and disbursal are dependent on the loan seeker’s credit score and history, the documentation that is needed is more than what is required while seeking gold loans. Borrowers are required to submit their ITR forms, payslips and other documents to get their application processed. Also, the verification of these documents usually takes time and the disbursal of personal loans may take up to 7 days.
Availability of security
“If a loan seeker owns sufficient surety and wants to pledge it to get a loan, a gold loan could be a better option, in terms of lower interest rates,” explains Singhal.
Having said that, While the value of the security is lesser than the loan requirement, a personal loan could be the go-to option if the borrower is eligible for the loan amount they seek.
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Quantum of loan
If the requirement of the loan is more, then the evaluation before disbursement of a personal loan is higher and more in-depth. Also in many cases, experts say, even after sufficient diligence, the borrower may not get the desired loan amount.
While in the case of a gold loan, the quantum is linked to gold quantity, thus there is no restriction on the upper limit, if the borrower has security and the TAT for disbursement does not significantly go higher.
Credit score
When borrowers’ credit score is poor, they might not be qualified for a personal loan. Even if they get one, Singhal points out, “the interest rate will be much higher than those extended to applicants with good credit scores. In such a case, going for a gold loan could be the better option than a personal loan.”
Income stability
Availing a personal loan could be complicated if the borrower does not have a regular source of income or no income proof. It may also be difficult for the self-employed or people with limited IT returns. In such a case, industry experts say, a gold loan could work better as the credit scores have a lower bearing on these loans.
Interest rates
The interest rate varies with each lender, be it gold loans or personal loans. The other factor that impacts interest rates is the duration of the loan. Singhal says, “The longer the duration, the higher the interest rates. This is applicable for both, gold loans and personal loans. However, gold loan rates are relatively lower than personal loan interest rates as it is a secured loan.”
Repayment
Personal loans are repaid in the form of EMIs, which includes both the principal and interest factor. However, gold loan companies offer a wider choice of repayment methods.
Singhal explains, “Apart from the usual EMI mode of repayment, NBFCs allow borrowers to just repay their interest amount every month leaving the principal component to be repaid on the maturity date.”
In the Bullet repayment method in a gold loan, a borrower can repay the entire amount of both the principal and interest amount at the end of the loan’s term and need not service EMIs.
The pick between a gold loan and a personal loan will mainly depend on the borrower’s requirements and credit profile.
Singhal adds, “Personal loans will be more suitable for those requiring smaller amounts of loans without the effort of pledging collateral, with good credit history and income documentation.
Gold loans will mainly suit those needing better flexibility in quantum, repayment or credit profile and are also suited for customers with irregular or higher cash flow cycles.
