Gold Loan vs Personal Loan - Read Benefits & Drawbacks

It is easier to acquire funds these days, especially when an unexpected financial emergency comes knocking on your door. When you do your research, you are more than likely to come upon at least two alternatives for your predicament.

Now, when you are looking for quick finances, you have two options—a personal loan or a gold loan. As an overview, these loans have rather similar features and offer decent interest rates. However, as you examine them even further, you will find one loan more beneficial than the other.

So, how do you gauge whether a personal loan or a gold loan is better suited for your requirements?

In the sections below, you will find the pros and cons of both these types of loans. So, let’s dive in!

What is a Gold Loan?

As the name suggests, a gold loan is when you pledge gold as collateral to acquire funds from a lender. Now, this is a secured loan and you can get up to 60% of the gold’s value as the loan amount. One thing you should know is that your lender will take the quality of the gold into consideration.

What are the Benefits of a Gold Loan?

A gold loan is bundled with several great benefits. Let’s take a closer look at them.

  1. Minimal Documentation - You are not required to submit an expansive list of documents to acquire a gold loan. Considering that this is a secured loan, the paperwork is reduced by a significant amount too. You may need to submit your identity proof and your address proof. Your lender may ask for additional documents, which depends on their requirements.

  2. Quick Processing - Since the documentation is minimal, the processing time for a gold loan is much quicker. In fact, you can expect your gold loan to be disbursed and credited to your account in a couple of hours.

  3. Lower Interest Rates - One of the biggest benefits of a secured loan is the low interest rate. Pledging collateral means you can get a gold loan at a much lesser interest rate, making your EMIs much more affordable.

  4. No Emphasis on Credit Score - If you are worried about your less than average credit score, you can stop. Lenders don’t usually check your score before approving your loan. This is because of the collateral you have submitted to get the loan. However, your score may be looked up if the amount you are borrowing exceeds a certain amount.

  5. Flexible Repayments - With a gold loan, you are offered three types of repayments. One, you can clear the loan in the form of EMIs. Two, you can pay the interest during the loan period and clear the principal before your term ends. Three, you can pay both the principal and interest at the end of your term. Since it’s not restrictive in nature, the repayment of a gold loan gives you much more breathing space.

What are the Drawbacks of a Gold Loan?

Just like there are pros in a financial product, there are certain drawbacks in a gold loan you need to consider as well.

  1. Shorter Tenures: If you compare a gold loan with a personal loan, the tenures are considerably shorter. With a personal loan, you have the option of choosing a repayment period of 1 to 7 years. Whereas with a gold loan, you may get 3 months to 3 years.

  2. Loss of Collateral: This is a huge risk because you have pledged gold as security. Inability to make your payments will result in the lender seizing your collateral. Now, this can be a huge loss if you’ve pledged a significant amount of gold as security.

Now that you are aware of the advantages and disadvantages of gold loans, let’s move on to personal loans.

What is a Personal Loan?

A personal loan is an unsecured loan you can borrow when you are dealing with a financial emergency. You don’t have to pledge any asset as security to acquire this type of loan. Let’s check out the pros of choosing a personal loan. In India, personal loans are offered by most banks, Non-Banking Financial Companies (NBFCs), and many third-party private lenders.

What are the Benefits of a Personal Loan?

This unsecured loan comes loaded with benefits that can ease the financial strain in your life.

  1. No Collateral Required: Getting a personal loan is relatively easy because you are not required to pledge any asset as collateral, whether it’s gold or life insurance.

  2. Personal Loans are Versatile: One of the biggest pros of a personal loan is the versatility. Your lender will never ask you to state the purpose of the loan or furnish documentation to support these claims. You are free to use these funds for varied purposes, as long as it’s not illegal in nature. This means, you can borrow a personal loan for medical emergencies, vacation, wedding expenses, purchasing big-ticket items, and more.

  3. Quick Processing: Once your information is verified and validated, it won’t take ages for the loan amount to be credited to your account. Usually, after approval, you can expect the loan to be disbursed within 48 hours. In fact, some banks also have pre-approved personal loans that can be disbursed in 30 seconds.

  4. Minimal Documentation: This is another benefit that has won tons of customers. All you have to submit are your KYC and income proof documents.

What are the Drawbacks of a Personal Loan?

For every advantage, there will be some disadvantages. Here are the cons of a personal loan you should know

  1. Dependency on Credit Score - Your approval for a personal loan is heavily dependent on your credit score. If your score is less than average, chances are your application may get rejected by your lender. Since you are not submitting any collateral to secure this loan, a lender will scrutinize your credit history. This helps them gauge if you are a responsible borrower.

  2. High Rate of Interest - Considering it is an unsecured loan, lenders charge high interest rates. This means, your EMIs will be much higher than that of a gold loan. You will also have to pay a processing fee, which is usually 1% to 2% of the loan amount.

  3. Prepayment Penalties - Unlike gold loans, clearing your dues before the term ends will attract a prepayment penalty. So, if you have suddenly come into money and wish to clear your loan, you must consider the penalty attached to this.

In most cases, a personal loan is preferred over a gold loan because in personal loan there is no risk of losing one’s precious asset like gold jewelry. These days personal loans also come with interest rates as low as that of gold loans and so they have an advantage over gold loans. Once you have examined all the features of gold and personal loan, you’ll understand that they both have their own pros and cons. Depending on your financial requirement, either of these loans can work in your favor. If you want to pay your loan without time constraints, a personal loan may be a good option. However, if your credit score is lacking, a gold loan can be the option that is best suited to meet your needs.

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