Financial emergencies can strike unexpectedly, even when you’re in a stable and optimistic position. Whether it’s a marriage or a medical emergency, you may find yourself relying on loans, which many people are hesitant to take. In such situations, one might consider either a gold loan or a personal loan to meet their needs. Both types of loans have their own advantages and disadvantages, and they differ in terms of duration, interest rates, borrowing limits, and other factors. Which is better? Gold loan or a personal loan. Which loan will serve you soon? Which one has lesser interest rate? These are the questions that one will encounter during this ‘selection’ process. Here we are helping out with all your queries regarding home loan and the personal loan.

What is a Gold Loan?

A gold loan is a type of loan taken by pledging gold to meet emergency financial needs. Gold coins, jewelry, or any form of gold assets are used as collateral with the bank. Typically, the lending institution offers a loan amounting to 75%-80% of the gold’s value, based on its market price and quality.
Generally, banks calculate the loan amount using the loan-to-value (LTV) ratio. You can repay the amount, along with interest, through EMIs. Once the full repayment is made, the bank will return the pledged gold.

According to ICICI report in the past few years, an increasing number of borrowers are relying on gold loans to meet such expenses.

Advantages and Disadvantages of Gold Loan

Advantages

Lower Interest Rates: Typically, gold loans have lower interest rates compared to personal loans.

Quick Processing: They usually have faster processing times since the collateral (gold) reduces the lender’s risk.

No Restrictions On The Use: Unlike other secured loans, there are no restrictions on the use of funds from a gold loan.

Credit history: is not required

Flexible Repayment Options: Many lenders offer various repayment options to suit the borrower’s needs.

Disadvantages

Collateral Required: You need to have gold assets to pledge as collateral, which can be risky if you fail to repay the loan.

Loan Amount Limited to Gold Value: The amount you can borrow is directly related to the value of the gold (LTV ratio) you pledge. Lender will only lend you only 75%-80% of the Gold value.

What are Personal Loans?

Bank considers a personal loan as an unsecured loan. This means you do not have to provide any collateral to get funds. After analysing your credit worth, if the lending bank deems you creditworthy, you will be eligible for the loan. Your eligibility will be based on factors such as income, repayment history, type of employment and credit history through CIBIL score. After the bank’s rigorous check, the better the credit score, the sooner the loan will be approved.

Advantages:

No Collateral Required: Personal loans are unsecured, so you don’t need to pledge any assets.

Higher Borrowing Limits: Depending on your credit score and income, you might be eligible for higher loan amounts.

Flexibility of Use: You can use the loan amount for any purpose, whether it’s a medical emergency, wedding expenses, or consolidating debt.

Disadvantages

Higher Interest Rates: Personal loans often come with higher interest rates compared to secured loans like gold loans.

Credit Score Dependent: Approval and interest rates are heavily influenced by your credit score, which can be a barrier for some borrowers.

Interest Rate of Gold Loans & Personal Loans

A gold loan is a secured type of loan as you are required to pledge your gold against the loan amount. However, a personal loan is an unsecured loan which does not require any collateral. As a result, personal loans are slightly more expensive than gold loans with respect to interest charged.

Most top lenders offer gold loan rate in the range of 10% to 16%. On the other hand, interest on a personal loan can range from 12% to 20%.

Additional Charges – Processing Fee

The next important factor is the additional charges that you’re required to pay when you take the loan such as the processing fee. For a personal loan, this can be 2% or more of the loan amount as per ICICI bank portal. Even if you want to prepay a personal loan, the prepayment charges can be up to 5% or more.

The processing fee of a gold loan is generally around 1% of the loan amount. If you want to prepay or foreclose a gold loan, the prepayment fee too is around 1%.

About Loan Amount

Gold Loan: The loan amount can be up to ₹25 lakh.

Personal Loan: The loan amount depends on the credit worthiness of the applicant and can range from ₹ 50,000 to ₹ 20 lakh.