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    HomeFinancePersonal Loan or Gold Loan: Which One to Choose?

    Personal Loan or Gold Loan: Which One to Choose?

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    Features like minimal document requirements and quicker disbursals make personal loan and gold loan as one of the most favoured credit options for meeting urgent financial requirements. However, there are multiple other factors that consumers should consider when choosing between these two loan options. Comparing them on these factors would help consumers in finding the optimum option that best suits their requirements.

    Here is the comparison between personal loan and gold loan features. 

    Interest rates

    The interest rates offered on gold loans are usually lower than personal loan interest rates. For instance, SBI personal loan interest rate is 11.05% p.a. onwards, whereas gold loan interest rates offered by SBI is 8.70% p.a. onwards. Lenders consider their applicants’ credit score, occupation profile, employer’s profile and other aspects of their credit profile while setting their personal loan interest rates, whereas in case of gold loans, lenders can also consider your repayment method, loan amount and type of loan scheme to determine your rate of interest.

    Loan amount

    Personal loans usually range between Rs 50,000 and Rs 40 lakh, with some lenders claiming to disburse higher loan amounts going up to Rs 1 crore. However, the eligible loan amount would primarily depend on the applicant’s loan repayment capacity and loan tenure. In case of gold loan, the loan amount is determined based on the valuation of the gold pledged as collateral and the loan-to-value (LTV) ratio set for the applicant, subject to the cap of 75% on LTV ratio set by the RBI. 

    Loan disbursal time

    The loan approval and disbursal process of a gold loan is usually faster than that of a personal loan. The loan disbursal time for personal loans applied through the offline loan application process is usually between 2 and 7 business days. However, with more lenders offering personal loans through end-to-end online processes, many lenders claim to disburse personal loans within a few hours of making the loan application. Those availing pre-approved personal offers may get the loan amount instantly within a few seconds. For instance, pre-approved customers applying for HDFC personal loans online can get the loan disbursed within 10 seconds of making the loan application. However, in case of other loan applicants, their turnaround time for disbursing the HDFC personal loan can go up to 4 business days. In case of gold loans too, the loan amount is disbursed quickly, usually within the same day of making the loan application. For instance, HDFC Bank claims to disburse gold loans within 45 minutes of making the loan application.

    Loan tenure

    The tenure offered on personal loan usually ranges from 1 to 5 years, with some lenders offering maximum tenure of up to 7 years. The repayment tenure of gold loan is generally on the shorter side, with the maximum tenure going up to just 3 years. However, some lenders also offer longer tenure of up to 4 to 5 years.

    Note that longer loan tenures result in higher interest cost but lower EMIs. Thus, personal loan would be an ideal borrowing option for applicants requiring higher loan amount and smaller EMIs. Availing a gold loan, on the other hand, would be suitable for those who have adequate repayment capacity to repay the loan within a shorter time frame. 

    Chances of loan approval for poor credit profile

    In personal loans, the absence of an underlying asset increases lending risk for banks and NBFCs as it leaves them with no security to fall back on in case the borrower defaults on the loan. To mitigate this risk, lenders take a more stringent lending approach during the loan evaluation process. They consider various aspects of an applicant’s credit profile such as his credit score, net monthly income, occupation profile, employer’s profile, etc. while assessing his personal loan application. Depending on the applicant’s credit profile, some lenders also set interest rates for their personal loans.

    Gold loans, on the hand, are secured loans. Having an adequate underlying asset as collateral allows lenders to sell the pledged gold to recover the outstanding loan amount. This decreases lending risk for the lenders. Hence, when assessing gold loan applications of those with poor credit scores, lenders tend to take a less stringent loan evaluation approach.

    Processing fees

    The processing fee for a personal loan usually goes up to 4% of the loan amount, with some lenders completely waiving off these charges or up to a specific loan amount. In case of gold loans, lenders usually charge around 1-2% of the loan amount. As the processing fees would also contribute to your overall cost of borrowing, ensure to factor in this fee while comparing various gold loan and personal loan options.

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