Gold loans and personal loans are two of the most popular options which credit-seekers consider in times of need. Both these loans are suited for short and medium term financial requirements, and offer several valuable benefits. However, each option also has its own drawbacks, which may or may not be a deal-breaker for loan seekers. Here, we will take a closer look at not just the benefits, but also the cons of both these loans, to help you decide which makes for a better option.
Personal Loans
Personal loans are typically unsecured loans which are provided for a short to medium term, especially for taking care of emergency financial requirements or small-scale financial obligations. These loans are usually provided without a collateral or security, hence are likely to levy a higher rate of interest. The primary factor influencing the approval of a personal loan is the borrower’s credit score, which reflects their repayment capacity and history. EMI calculator is a very useful online tool which can help you determine the EMI payable depending on your preferred personal loan tenure and amount.
Benefits
● No Collateral Required – One of the defining features of a personal loan is that it doesn’t require the borrower to pledge a collateral with the lender to obtain the loan. The borrower does not have to pledge any of their assets like gold, real estate, life insurance, etc. as security against the loan.
● Lesser Paperwork – If you want to apply for a personal loan, you do not have to provide too many documents. The lender will usually ask you to provide basic KYC documents, along with a proof of income, and that will be about it.
● No restriction on end use – Another beneficial feature which a personal loan offers is versatility. When it comes to the end use of a personal loan, there is no restriction on the purpose for which the funds can be used, as long as it is not illegal. Hence, one can use personal loans for a number of requirements like renovating their house, paying off old debts, purchasing high-end electronics, furniture, paying for a wedding, etc.
● Quick loan disbursal – Once your loan has been approved, it does not take long for the amount to be credited to your bank account. A majority of lenders and banks will credit the loan amount to your chosen bank account within a period of 48 hours, following approval.
Drawbacks
● Heavy dependence on credit score – One of the primary factors influencing personal loan eligibility is the borrower’s credit score. In the absence of a collateral, the borrower’s credit score serves as surety of loan repayment. A low credit score can translate to higher risk of non-payment, hence result in rejection of loan application.
● Higher interest rates – The interest rate on personal loan is one of its major drawbacks. Personal loan rates are relatively higher compared to all other types of loans. This means that, in addition to the principal loan amount, there will be a significant interest amount that you will also have to pay to obtain this credit. Personal loans also charge a loan processing fee which is a certain percentage of the sanctioned loan amount.
● Penalty on prepayment – Prepayment of a personal loan is something that banks/lenders charge a penalty towards. So, if you do have some extra cash and want to pay off your loan earlier, you will have to pay a penalty for doing so.
Gold Loans
A gold loan is a secured loan wherein the borrower pledges a certain amount of physical gold or jewellery as collateral in exchange for credit. Gold loans are an ideal option of getting funds especially in an emergency, and can be obtained in a very short time.
Benefits
● Minimal documentation required – Banks and lenders who offer loans in exchange of gold do not require extensive documentation to approve the loan. Since no security is being pledged, it reduces the amount of paperwork that needs to be provided.
● Quick loan processing – Between personal loans and gold loans, the latter features an even quicker loan processing time. Since there is lesser documentation to be processed, gold loans can be disbursed within a few hours of approval.
● No dependency on credit score – Unlike personal loans, if you are taking a gold loan, your lender is not likely to be too concerned about your credit score. This is due to the fact that the gold being pledged acts as collateral against the risk of non-repayment of loan amount.
● Lower rates of interest – One of the major reasons why gold loans are preferred over personal loans is the interest rate. Gold loans charge a relatively lower rate of interest as compared to a personal loan. This translates to a lower interest outgo from your pocket, which is always a good thing.
● Flexibility in repayment – For gold loans, borrowers can choose from a range of repayment options as per their budgetary convenience. Borrowers can (i) Pay off their loan in EMIs, (ii) Pay the interest during the loan period, and pay the principal towards the end of the loan term, or (iii) Simply pay off the loan amount (interest + principal) at the end of the loan term, without having to pay anything before.
● No prepayment fees – Unlike a personal loan, gold loans usually do not levy a loan fee on prepayment of the loan.
Drawbacks
● Low quantum of loan – Under a gold loan, lenders usually do not offer more than 75% to 80% of the value of gold pledged. Therefore, the remaining value of the gold remains unutilised for the borrower and instead, goes to the bank.
● Chance of loss – In case of a personal loan, there is no collateral pledged that can be taken over by the lender. However, under gold loans, the borrower is at the risk of losing their gold if they are unable to repay the loan.
● Shorter loan term – As compared to a personal loan which comes with a term of 1 to 7 years, gold loans come with a much shorter tenure. On an average, a gold loan may be provided for a term of 3 months to 3 years.
Considering all the points mentioned above, it can be concluded that both – personal loans, and gold loans – come with their own set of advantages and disadvantages. While one may work for some people, the other may work for some others. Therefore, it is important that, as a borrower, you must explore all available options before deciding which one to go with.
(This post has been contributed by Bankbazaar.com)
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