Gold Loan vs. Personal Loan: Making the Right Financial Decision

In every individual’s life, there are a few instances when the need for a large sum of money arises. The reason could be anything, such as a medical emergency, educational expenses, business needs, or house renovation. Sometimes you might have enough money in your savings, but there can be times when you don’t readily have the funds. In such cases, the need for some financial aid arises.

In today’s time, there are a number of financing options available that can help you get over a temporary cash crunch. Gold loans and personal loans are two of the most popular ones. However, choosing one of these two can be a real challenge.

What is a Gold Loan?

A gold loan, as the name suggests, is a financing option in which one can obtain a certain amount by pledging gold assets like coins, bars, jewelry, etc. This is a type of secured loan where gold ornaments act as collateral. In India, where gold is considered a status symbol and one of the most preferred investment avenues, the concept of gold loans is centuries old. In early times, people used to borrow money from pawnbrokers and money-lenders for their gold ornaments. Now these traditional lenders have been replaced by government-authorized financial institutions. Currently, there are a number of banks and NBFCs offering hassle-free gold loans in India. All you need to do is explore several different options and choose the one that meets your preferences.

What is a Personal Loan?

A personal loan is a type of unsecured loan where an individual can obtain a lump sum of money for a certain period of time. Just like gold loans, these loans can be availed of for a variety of reasons. The lending institutions give the borrower complete flexibility over fund usage. However, a personal loan doesn’t require any kind of collateral or security.

Gold Loan vs. Personal Loan

Here is a detailed comparison of these two popular financing options on the basis of several important factors:

Loan Amount

For both types of loans, there are minimum and maximum limits for the loan amount one can apply for. This amount can vary from one lending institution to another. In a personal loan, the applicant’s credit history and repayment capacity are the key determinants. On the other hand, a gold loan’s principal amount depends on the weight and purity of the gold assets that an individual is going to pledge. In addition to this, the market rate of gold is also an important factor that determines the loan amount.

Rate of Interest

The applicable rate of interest is one of the key considerations in the process of choosing a financing option. One simple reason behind that is – the lower the interest rate, the lower your repayment amount will be. Since gold loans are secured, they are available at lower interest rates as compared to personal loans. However, it is something that can vary from one lender to another and depends on the applicant’s credit history. So, it is always best to check the interest rate you’ll be offered on both options.

Ease of Application

Gold loans are known to have a simple application process. All you need to do is submit your loan application and get your gold assets evaluated. This will give you a fair idea of the loan amount you’re eligible for. Once done, you will need to submit all the documents required for gold loan approval. Since gold loans are secured where pledge ornaments act as collateral, the documentation requirement is also very minimal. Once the document verification is completed, your loan amount doesn’t take much time to get disbursed. On the other hand, the documentation for personal loans is slightly complex, making the process more time-consuming. Once the documents are submitted, the verification process also takes a few more days.

Eligibility Criteria

For personal loans, lending institutions are more stringent, as they have to ensure that the borrower will be able to repay the loan. An individual needs a steady monthly income as well as a good credit score to obtain a personal loan. But the case is different with loans taken against gold ornaments. Since the lender will have gold ornaments as collateral, the eligibility criteria is flexible. Anyone who is above the age of 18 years and has gold ornaments of a certain purity can apply for a gold loan.

Loan Tenure

Generally, personal loans in India come with a tenure of 1-5 years, depending on the lending institutions. On the other hand, gold loans have a shorter tenure that can range from 7 days to 36 months. So, individuals who need money for a longer period of time prefer personal loans. Gold loans, on the other hand, are more suitable for people who have to deal with a temporary financial crisis.

The Verdict

Gold loans and personal loans are two popular financing options that come with their own set of advantages. Although choosing one of them can be really difficult, there is no universal answer to this commonly asked question. The suitable type of loan depends on the specific requirements of an individual.

At Muthoot Finance, we offer several different schemes for both of these loans. Using our online EMI calculator for personal loans and gold loans, you can get an approximate idea of the monthly amount you’ll need to pay. Visit your nearest Muthoot Finance branch to know more.