Personal Loan vs Gold Loan: Why are gold loans and personal loans so common? prompt disbursement and unrestricted use of loan proceeds in the final product. The choice between these two options would mainly depend on how well the differences between personal loans and gold loans fit their borrowers, aside from having sufficient gold jewellery and ornaments as collateral. So the question is, which is better, personal loans or gold loans?
Collateral Consideration
When assessing applicants for personal loans, lenders exercise caution because collateral is not required. Lenders assess an applicant’s creditworthiness based on a variety of factors, including their employment history, monthly income, credit score, and employer profiles. In the event that a gold loan defaults, lenders may sell the pledged gold ornaments because gold loans are fully secured and backed by sufficient collateral. This makes it possible for lenders to assess applicants for gold loans more leniently. Therefore, those with bad credit scores and/or credit profiles who are unable to obtain personal loans may want to think about applying for gold loans.
Standard Personal Loan Interest Rates
Interest rates on personal loans typically begin at 10.5% annually, though this can vary based on the applicant’s credit history and the lenders’ credit pricing guidelines. Lower interest rates on personal loans, however, might be available from certain public sector banks. Depending on the length of the loan, the amount borrowed, and the repayment plan selected, interest rates on gold loans can differ significantly.
For applicants with strong credit histories, the interest rate difference between gold loans and personal loans might not be significant; however, for those with less favourable credit histories, gold loan interest rates are typically lower than those of personal loans. Because gold ornaments can be used as collateral, lenders can charge lower interest rates than they would for personal loans because they are less risky.
Standard Personal Loan Amounts
While some lenders claim to be able to disburse higher loan amounts of approximately Rs 30-40 lakh, personal loan amounts typically fall between Rs 50,000 and Rs 15 lakh. However, the applicant’s ability to repay the loan and the loan term he selects will largely determine the maximum loan amount that he is eligible for. When it comes to gold loans, the loan amount is largely determined by the loan-to-value (LTV) ratio that the lender sets and the value of the gold that is deposited as collateral. The RBI’s regulatory cap, however, prevents the gold loan LTV ratio from rising above 75%.
Standard Personal Loan Repayment Terms
Personal loan terms typically last one to five years, however some lenders allow for maximum terms of seven or eight years. With most lenders offering maximum repayment terms of three years, gold loans typically have shorter repayment terms. Nonetheless, a few providers of gold loans provide marginally longer terms, up to four or five years.
Shorter repayment terms result in lower interest rates but higher equated monthly instalments (EMIs). Therefore, applicants who can repay their loans in a shorter amount of time and have sufficient repayment capacity should choose gold loans. Personal loans, on the other hand, should be preferred by applicants who need longer terms because of higher loan amounts and/or lower repayment capacities.
Diverse Repayment Options
When it comes to gold loans, lenders provide a greater selection of repayment options. In addition to the standard monthly installment plan, many lenders let borrowers of gold loans pay back the interest portion each month and repay the principal amount when the loan matures. Additionally, some lenders let their clients pay back the interest only at the time the loan is disbursed; the principal must be paid back when the loan term expires. Furthermore, some lenders for gold loans provide the option to repay the principal and interest at the conclusion of the loan term. Those who need money to manage short-term cash flow mismatches and applicants looking for repayment flexibility would benefit from these non-EMI-based gold loan repayment options.
Principal and interest are typically repaid in the form of equal monthly payments (EMIs) for personal loans. On the other hand, a lot of lenders now provide personal loans as overdraft facilities, which give borrowers a credit limit. The principal can be repaid by borrowers based on their available funds, and the interest component must be paid each month. In addition, the borrower is able to make numerous deposits and withdrawals in accordance with their cash flows. Instead of being based on the authorised limit, the interest cost is assessed based on the limit that is actually used. Therefore, as an alternative to gold loans, borrowers looking for more repayment flexibility may want to look into personal loan overdraft facilities.
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