A loan is something unavoidable in personal finance. Most of us will encounter situations wherein well need more financial help than our available resources can fulfill. Such events where we require financial assistance suddenly could be planned or unplanned.
Planned ones are those like marriage of your child or getting your house renovated. A medical emergency calling for surgical intervention may be an example of an unplanned event.
It might put one in a compelling situation of arranging for a massive amount of money overnight. Someones life might be at stake, and a promptly availed loan could save that. Both personal loans and gold loans come in handy in situations like this. Let us examine each one for its merits and demerits.
A personal loan is an amount of money you can borrow from a lender without pledging any other asset. Pledging means that you allow the lender to recover the loan amount by selling that asset if you fail to repay that loan. This is not the case with a personal loan.
This is why personal loans are also known by other names like a signature loan, character loan, or good faith loan.
As the name suggests, a gold loan is a loan you can avail by keeping your gold jewelry as security with the lender which is why this is considered to be a secured loan. The lender can recover an unpaid loan by selling the gold against which it was given.
Using gold as an asset against which monetary assistance is provided is a very old practice. In India, since ancient times, people have borrowed money from lenders by keeping their gold assets as mortgages and getting cash in return.
Gold loans were still there when modern society didn’t have so-called structured mechanisms for borrowing.
These days most NBFCs and banks have a gold loan product that covers the traditional credit system against pledging gold assets.
Most Indian households happen to have some jewelry that has been traditionally gifted to the bride at the time of her marriage. Sometimes, Indian families also have gold objects passed off as heirlooms across generations.
A gold loan can be had against such jewelry or other gold objects. On repayment of the borrowed amount, the lender returns the pledged gold to the borrower.
When it comes to choosing between the two, one has to know both in detail, the pros and cons of both, and which one will work better for you in the time of need. Let us consider common aspects of both side by side.
The amount of a gold loan directly depends on the valuation of gold objects pledged to the lender. However, even if the amount of gold objects pledged is the same, the valuation might vary from lender to lender.
The lenders (Banks/NBFCs) perform such valuation either at their premises or by sending their executives to the doorsteps of the borrower to comply with the current COVID stay-at-home protocols. Valuation is based upon the per gram rate of gold at the market price for the purity (caratage) of the jewelry pledged.
RBI had earlier mandated a loan to value (LTV) ratio of up to 75% or the loan amount not exceeding 75% of the valuation of pledged gold via a circular in 2017. However, in a drive to mitigate financial stress caused by the Covid pandemic on households, entrepreneurs, and small businesses, the central bank has elevated this limit to 90% from 1st April 2021.
Since people seeking a gold loan may not have a solid credit history or a sound monthly income apart from the jewelry, the loan amount is curbed by the prevailing LTV ratio. This is clearly to avert unforeseen risk borne by the lender and/or limit that to below the value of gold being pledged.
Though ‘unsecured’ in nature, a personal loan amount can be much higher than a gold loan. Personal loans are more readily available than gold loans to people who are working professionals and maintain a good credit history.
Although these days, personal loans are available to self-employed people and those with low to an average CIBIL score, for example, Money View offers personal loans to people with CIBIL scores below 650.
The Personal loan amount typically varies between INR 50000 to INR 20 lakh. However, some lenders can stretch this up to INR 75 lakh, depending upon the borrower’s profile. Such priority or preferred customers of a personal loan may be doctors, CAs, established lawyers, architects, etc.
Personal loans have predefined eligibility criteria of age, minimum annual income, minimum work experience, etc., to qualify for. The amount to be disbursed is decided post fulfillment of eligibility criteria.
Gold loans being fully secured by the pledged jewelry takes the least time to be disbursed. Once the ornaments are handed over to the lender by the borrower, it’s subjected to valuation as per the current market rate of gold for the specific purity (BIS) of the objects.
Hence, loan processing is ultra-fast, ranging from a few minutes to a maximum of 24-48 hours. Often immediately after valuation and filling up a form or two, the borrower can leave with the disbursed cash or get it credited to their bank account within moments.
The unsecured personal loans are sanctioned in good faith bestowed upon the borrower’s income profile and credit history.
After the borrower submits necessary documents like bank statements, income tax returns, salary slips, etc., these go through verification by the lender, which further increases the processing time in this case.
It generally takes 2 to 7 days of processing time for a personal loan. However, specific online and app-based lenders can do this in minutes - from applying the loan to its disbursal. However, these days online sites like Money View can approve and credit the loan to your account within just 24 hours.
A loan tenor (or tenure) is the time allowed for repaying it. As you need to pay interest on the loan as long as it is due, the tenor actually decides the ‘cost’ of the loan, whether cheap or expensive.
The tenor generally lies between 7 days to 3 years for gold loans. Some lenders even allow a tenor of up to 5 years.
The rate of interest may increase drastically for overshot tenor with some lenders. As interest burden is a direct function of tenor, the shorter it is less is the interest payout. So people confident of repaying within 1-2 years should better apply for a gold loan.
Most seekers of personal loans look for a longer tenor for a small EMI repayment amount. The tenure generally varies between 1 and 5 years. However, the same rule of paying more interest with a longer tenor applies here.
If income and repayment capacity permit, one must opt for a shorter tenor or early repayment if there are no or minimal charges.
You may expect a lower interest rate for a personal loan for preferred income and profession type.
The loan processing fee is the least, with a gold loan at 0.1-1% of the loan amount or a flat price as low as INR 10.
But the processing fee can go up to 3% of the disbursed amount in case of a personal loan.
It is in the form of Equated Monthly Installments (EMI) having two components, i.e., interest and principal, for the personal loan that is repaid thus over the loan tenure.
However, with a gold loan, repayment options are pretty interesting. You may either
i) Pay the entire interest amount upfront at the time of disbursal and pay the principal amount on maturity.
ii) Pay(service) interest monthly and pay the principal on maturity.
However, non-EMI repayment doesn’t suit individuals having short-term cash flow fluctuations. Gold loans generally do not attract prepayment charges.