How many times in a day do we have to make choices? Literally every hour we live, isn’t it? Our lives today consist of multiple choices on a daily basis, and honestly, these are the choices that make us. Would you not agree that our choices are what makes us? For instance, choosing to choose a certain career path is a choice that makes us. Similarly, there are various choices that also make up for us and our daily lives. Beginning from, ‘should I use cash or a card for this transaction?’ all the way to, ‘what is the best investment option for me?’ So, this post is also going to speak about a choice that you would make on your financial front, and that is helping you choose between a personal loan or a gold loan.
But – before we could even get to the main part of it – can we just understand the basics of them both? Here it goes.
What is the Meaning of a Gold Loan?
A gold loan is one that is secured, and the borrower holds their gold, ranging from 18K to 24K, as security with a bank or financial institution and receives cash against it. In comparison, a gold loan is similar to a “mortgage loan,” in which the owner keeps their house or property as a mortgage with the bank and obtains a loan against it to meet their capital needs.
A gold loan scheme is one of the most profitable loans for banks since it eliminates the risk of non-performing assets (NPAs). It is because of the fact that the jewelry used as collateral remains with the bank even if the borrower fails to pay their monthly installments (EMIs) on their loan.
Now, your gold loan would not be exactly the price of the gold. For instance, if you are in Chennai, and you look up the gold price in Chennai today, and it comes up to Rs. 45,000 – you would not have the whole amount. Instead, the institution would give a particular percentage of the whole value.
What is a Personal Loan?
A personal loan is the money obtained from a bank, credit union, or online lender that you repay through fixed monthly payments, or installments, usually over the course of two to seven years.
Though it’s normally advisable to utilize the savings or the emergency fund to meet some unforeseen needs, personal loans could be useful for non-discretionary objectives such as debt restructuring.
The majority of personal loan schemes are mostly unsecured, which means they are not secured by collateral. Lenders base their decision on factors such as your credit score, credit history, debt-to-income ratio, and free cash flow.
You would be offered a secured or co-signed loan if you do not qualify for an unsecured loan. Secured loans will mostly be secured by an asset, such as your home or car, and if you default, the lender of the loan can repossess your property. Co-signed loans require an additional applicant with a strong credit history to assist in guaranteeing the loan; they will be liable for late payments.
Other forms of personal loans are inclusive fixed-rate loans, in which your interest rate and monthly payments remain constant, and variable-rate loans, in which your interest rate and payments fluctuate.
What is the Better Option – A Personal or a Gold Loan?
Here are some of the factors that talk about the better choice among the two options:
a) The Interest Rates
Personal loans have annual interest rates ranging from 8.45% to 26%. The annual interest rate on gold loans ranges from 7.25% to 29%. You can get cheaper interest rates on both gold loans and personal loans if you have a strong credit history. However – if your credit score is low, a gold loan may be a better option.
b) Options of Repayment
Personal loans will be repaid in the form of monthly EMIs (interest + principal) spaced out over the loan term. The gold loan, on the other hand, provides a variety of repayment choices, including EMIs. A gold loan borrower, for example, can choose to only service the interest component each month, leaving the principal to be paid up at maturity.
Another alternative is to pay the interest amount when the loan is disbursed and then pay the principal at the conclusion of the loan term. A non-EMI repayment option may not be a smart alternative if you have payback difficulties owing to short-term cash flow volatility.
c) The Period of the Loan
Personal loans are available for terms ranging from one to five years. Some lenders may provide terms of up to 7 years. The duration of gold loans often ranges from 7 days to 3 years. Some lenders may provide terms of up to 5 years. A personal loan is a greater option if you desire a longer repayment period. In addition, if you can pay off the loan quickly (within one or two years), a gold loan may be a more cost-effective solution.
d) The Loan Amount
Personal loans often vary between 50,000 and 20 Lakh. Based on the loan length and your repayment capabilities, certain lenders may even provide a larger loan amount of up to 40 lakh. Since a gold loan is one that is secured – the loan amount is determined by the value of the gold utilized as collateral. Typically, a loan of 75% of the gold’s worth is approved.
e) The Time Taken for Processing
Because personal loan applicants must provide documents such as payslips/ITR forms and other needed documents, the materials may take 2 to 7 days to be validated and loan applications approved. However, new-age fintech lenders can handle a personal loan application in less time. In the case of a gold loan – the lender verifies the validity of the pledged gold to determine loan eligibility. A credit score might not even be considered. This saves time, and the loan is approved as soon as possible.
f) The Fees of Processing
Personal loan processing fees might reach 3% of the loan amount. Lenders may charge a processing fee of 0.10% to 2% of the loan amount or a fixed price as low as 10 for gold loans. So compare the processing fees of both loan options, do the math, and select the cheapest loan by calculating the actual cost of obtaining a loan.
Our choices, as already said, do make us. But, do you know what the stance on making our choices is? Our own circumstances and lives. If you are someone who wants more money than the gold you own, you know a gold loan is not meant for you. When you know a personal loan’s EMI is way too high for you to pay, then the other way is the best choice. Therefore, these factors can only show you a path, but what you are equipped with can walk you down the right lane.