Priya Khare, 32, is newly-married. As a smart financial planner, she has her investments sorted and pays the bills on time. She also works with an MNC and draws a healthy income. The couple are now looking ahead to refurbish their home and require urgent funds for the same. How should Priya meet this financial requirement? Should she apply for a personal loan or take a loan against gold?
Before taking any decision, Priya needs to consider the pros and cons of personal loans and gold loans. In case of a personal loan, she does not have to provide collateral to the bank, whereas if she takes a gold loan, she will be pledging the gold ornaments against the amount disbursed. Loan against gold and personal loan can be used for any financial obligation, and have no restriction on their end use.
Let us look into the details of both these loans to understand what will work out the best for Priya.
As unsecured loans, these are ideal to meet any short-term financial requirement. A personal loan is normally opted for funding weddings, medical treatments, big-ticket expenses such as funding a vacation, and in Priya’s scenario, home renovation. One can borrow as low as Rs. 1 lakh up to Rs. 50 lakhs. Interest rate is as low as 10.99%.
- No Collateral: Borrowers do not have to keep any asset (life insurance policy, gold, property etc) as security with the bank/NBFC. Thus, many prefer personal loan over gold loan, wherein the latter, the gold jewellery is kept as security.
- Quick Disbursement: The borrower can expect the loan disbursal to happen within 24 hours to 48 hours.
- No Branch Visit on Online Application: If an individual applies for a personal loan online, he/she does not have to make any branch visits unlike during gold loan, where the applicant necessarily has to visit the bank/NBFC for gold evaluation.
- Minimal Paperwork: Basic KYC information documents are required along with proof of income and bank statements. Personal loans do not involve elaborate paperwork like other traditional loans such as home loans, business loans, education loans etc.
- Flexible Tenure: The repayment tenure of personal loans varies between 1 year and 5 year. Depending on the amount to be borrowed and EMI structure, a suitable tenure is decided for the borrower.
- Credit Score Check: As personal loans are unsecured, banks and NBFCs conduct a thorough enquiry about the borrower’s credit history and credit score.
- Income Proof: The applicant has to submit a proof of income, without which the loan shall not be sanctioned.
A loan against gold is used to meet urgent cash needs such as travel trip expenses, medical expenses, home renovation, wedding, education etc. These are short-term loans and offered against gold jewellery. One can borrow between Rs. 50,000 to Rs. 50 lakhs. Interest rate is as low as 10.50%.
- Swift Processing: Once the documents are verified and gold asset is evaluated at the bank/NBFC branch, the applicant can expect the funds the same day.
- Basic Documentation Only: Only basic KYC documentation is required. No income proof or ITR proof is necessary.
- No Credit Score Check: No credit check is necessary. People with low credit score can also apply for loan against gold. Credit score of the applicant may be considered only if the borrowing amount is too high.
- Short Tenure: The maximum tenure for gold loan is 2 years. Thus, if the borrower is able to repay the amount earlier, he/she can be off the burden of paying more interest on the loan amount.
- Comfortable Repayment: The borrower can be eligible for any of the three most common repayment options: a) regular EMIs (interest amount + principal amount), b) pay only interest through the loan tenure and then pay the rest at the end of the tenure, c) pay the loan amount and interest at end of tenure with no payments beforehand.
- Loss of Asset: If the person is unable to pay off the loan, the gold ornaments submitted as collateral will not be returned to the borrower.
- High Margin: Financial institutions may offer a maximum up to 75% of the gold’s value (current market value). Thus, the remaining 25% of the gold value goes towards the financial institution’s margin and cannot be monetized.
In conclusion, it must be noted that both personal loans and gold loans have unique characteristics and can be used to fund multiple financial needs. Priya can opt for either of these loans. However, she needs to understand which loan option would work the best for her, according to her requirement, and come to a decision.
- The very first criteria to judge the kind of loan she needs is, the loan amount required. If she requires less than Rs. 1 lakh, she can choose a loan against gold.
- Another aspect to judge is the prepayment charges. For gold loan, Priya can prepay without attracting additional charges after the first three months, whereas for personal loan, she can prepay without paying prepayment fee, after completion of a year.
- How much time does she need to pay off the loan? If two years proves to be financially compromising, then Priya can opt for a personal loan, which extends up to 5 years.
- Since the interest rate difference is negligible (10.99% onwards for personal loan and 10.50% for gold loan), she can calculate the financial impact the interest rate difference will have, and decide on either one of the two.
Thus, it is evident that choosing between gold loan and personal loan is purely subjective and influenced by many circumstances. If you want to opt for a personal loan or gold loan, go through the above-mentioned respective pointers to understand the loan option that is most suiting to your needs. Do not forget to compare offers before you apply for the loan.