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GOLD LOAN VS. PERSONAL LOAN - WHICH IS BETTER AND WHY?

An individual may seek financial assistance now and then, and often they may need money on short notice. There can be many reasons for that. For consideration, they may require funds to meet the needs of a recently established business, repay borrowed money, pay fees of school or college, renovate the property, fulfill travel goals, and meet expenses of medical emergencies, among several others.

When it comes to the options available to people to overcome their liquidity shortages, especially arising out of emergencies or loss of income, gold loans and personal loans are extremely popular choices. However, to be able to identify which option can best cater to the needs, it is important to learn about them in-depth.

Now before digging into the concepts of gold loans and personal loans, on the basis of different criteria such as personal loan interest rates and gold loan rates, let us understand the basic difference first.

Difference Between Gold Loan and Personal Loan

In simple terms, gold loans are loans against your gold. They are secured loans in which the borrower pledges their gold assets and gets a percentage of the gold’s value as the loan amount. In general, the loan to value (LTV) ratio for gold loans is up to 75% and may vary from one lender to another. Once the loan amount is sanctioned and disbursed, the borrower pays off the loan as per the agreed terms. The lender returns the gold taken as collateral to the borrower once the person repays the entire loan amount. In the case of gold loans, since the borrower is already giving their gold assets as security, the credit score is not a criterion to decide its approval. To avail of a gold loan, the person needs to take their gold assets to the bank or NBFC for the assessment of their value. The tenure of gold loans is usually between 7 days to 36 months.

Personal loans are unsecured loans which are also known as signature loans and don’t require the borrower to provide any collateral to the lender. Unlike gold loans, personal loans are not approved immediately as banks and NBFCs, processing loan applications, take time to check out the borrower’s credit history before sanctioning the loan. This way, lenders get a clear idea of the borrower’s credit payment history. So, credit history plays a critical role in the approval of the loan application. Other than the credit score and history, the amount required by the borrower is also evaluated by banks and NBFCs on the basis of their monthly income. To avail of a personal loan, the person does not require to visit any bank or NBFC as they can now easily apply for it online. The tenure of personal loans is usually between 12 months to 60 months.

Understanding Gold Loan Vs. Personal Loan

Principal Amount

In the case of gold loans, the principal amount depends on the total value of the gold assets pledged by the borrower. Banks and NBFCs like Muthoot Finance offer gold loans based on the current market price of the gold. These institutions take into consideration the purity and weight of the gold. So, the amount sanctioned for gold loans leans on their per gram value and purity.

In the context of personal loans, the amount that needs to be borrowed hinges on the borrower’s credit history and monthly income. So, it is safe to assume that the applicant may have a hard time getting approval on personal loans if their credit score is not good.

Interest Rates

In general, the rate of interest varies with each lender, be it gold loans or personal loans. The other factor that impacts interest rates is the duration of the loan. The longer the duration, the higher the interest rates. This is applicable for both, gold loans and personal loans. However, gold loan rates are relatively lower than personal loan interest rates.

This is because gold loans are secured loans as the borrower is putting up their gold assets which reduces the risk of lenders in case of non-payment. Personal loans, on the other hand, due to their unsecured nature, will attract higher interest rates. But again, the interest rates are subject to vary depending on the lender and the duration of the loan. For instance, with a reputed NBFC like Muthoot Finance, people get the flexibility to decide and choose a suitable time frame for the repayment of the loan, be it gold loans or personal loans.

Besides, there are certain factors that play a role to help individuals availing of low-interest personal loans. These include having a steady source of income, getting the loan against 100 percent collateral, the age of the borrower, and the nature of employment.

Processing Time

The loan amount in the context of gold loans is disbursed within a few hours or minutes depending on the gold provided as security. Once the gold is handed over by the person, its value is ascertained based on its purity, weight, and current market price, and the person after filling a few forms can simply walk away with the cash or have it transferred into their bank account.

When it comes to personal loans, the processing time is higher. This is because there is no collateral involved and the lender requires to check the borrower's credit history and the authenticity of the submitted documents before approving the application.

Processing Fees

Owing to the fact that gold loans involve minimal documentation and quick disbursal, the processing fee is minimal. It usually varies between 0.25 – 1 percent of the loan amount. Speaking of personal loans, lenders usually charge a processing fee of 0.5 – 2 percent of the loan amount. This is because personal loans require the lenders to perform a lot of checking such as scrutinizing income proof and financial status, which involves time and effort.

Prepayment Charges

Well-established NBFCs like Muthoot Finance offer the best gold loan rates and don’t charge for the prepayment of the loan amount. With gold loans, you have the flexibility to repay any amount at any time as per your convenience. However, in the case of personal loans, the borrower will have to pay a pre-payment fee which may be around 2 percent of the remaining principal amount.

It all comes down to the borrower’s needs and preferences. If the person needs money for a short duration that ranges between a few days to months, then a gold loan is the way to go as it comparatively has lower interest rates. However, if the person needs money for a year or more, then a personal loan is the right choice.

Muthoot Finance offers gold loans and personal loans with easy terms and conditions. Individuals looking for gold loans can check out Muthoot Finance’s gold loan per gram rate and schemes on its website. Besides, Muthoot Finance has the best offers for personal loans as well. Since individuals can apply for a personal loan online, the process becomes simple, easy, and quick.

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