Why Are Gold Loans the Best Option When Banks Reject Your Personal Loan?

When in need of urgent finances, many people often turn to a personal loan to fund their needs, as they do not require any collateral and are granted in a relatively short amount of time. However, what if your personal loan gets rejected due to a low credit score or lack of documentation? This is where a gold loan can help.

Table of Content

• Understanding Why Banks Reject Personal Loans
• What are Gold Loans?
• Advantages of Gold Loans Over Bank Personal Loans

In India, gold has long been a highly valued metal, used in festivals and as a gift for weddings, birthdays, and anniversaries. Due to their sentimental value, people preferred keeping them in lockers and safes. But the times have changed, and many of us have started using our gold to avail short-term loans at interest rates cheaper than those offered on personal loans.

Understanding Why Banks Reject Personal Loans

Here are some of the common reasons why banks reject personal loans:

• Low income: One of the most common reasons for personal loan rejection is a low income than the requirement set by the lender. Most lenders have a minimum income requirement of INR 25000; anything below that is rejected.
• Low credit score: To be eligible for a loan, you need to have a credit score of 650+. Anything below that will jeopardise your chances of availing the loan.
• Job instability: Lenders look for borrowers with job stability to ensure they can repay their loan successfully. So, if you switch jobs regularly or have been unemployed for long periods, your loan might get rejected.
• High debt-to-income ratios: Another key factor lenders look for is the debt-to-income ratio. A high ratio indicates a borrower's inability to take on additional debt. Most lenders prefer a debt-to-income ratio of below 40%.

What are Gold Loans?

A gold loan is a type of secured loan where you pledge your gold as collateral to the lender and borrow money against it. Once you repay the loan with interest, you get your gold back. A loan against gold serves as a valuable source of instant capital when a person needs funds immediately.

Advantages of Gold Loans Over Bank Personal Loans

Here are some key advantages of choosing a gold loan vs a personal loan:

1. Easier Eligibility Requirements

The eligibility requirements for a gold loan are a bit lenient, as gold serves as collateral security. In comparison, personal loans have stricter criteria based on credit score and income, often rejecting those with weaker profiles. This makes a gold loan an ideal choice for urgent needs.

2. Less Time Required For Approval

In a personal loan, approval is given on the basis of the borrower’s documents and CIBIL score. This can take time as lenders will have to verify these documents, leading to a delay in the approval and disbursement process. In contrast, the gold loan approval process is quite straightforward. You just need to submit your gold and get it inspected. Once approved, you will get the loan within 1-2 days.

3. Lower Processing Fees

For the personal loan approval process, the lenders need to verify the borrower’s income-related documents. As a result, they charge a processing fee of 0.5% to 1% of the loan amount to the borrower. On the other hand, gold loans do not have much processing requirement, thus often offering less or zero processing fees.

4. Lower Interest Rate

Gold loans offer lower interest rates compared to personal loans. In personal loans, lenders charge interest rates ranging from 16 to 22 per cent, while the interest rates for gold loans are between 11 and 13 per cent. This makes a gold loan a great option for borrowers, helping them save more money while also being able to get access to much-needed funds.

5. Flexible Repayment Options

Since gold loans are secured against gold, they offer flexible repayment options compared to personal loans. Common repayment options for borrowers include bullet repayment (principal and interest paid at term end), interest-only payments (interest periodically, principal later), partial payments toward principal anytime, and customizable EMIs (weekly, monthly, quarterly, or annually).

6. No Pre-Payment Charges

In gold loans, you can pre-pay your loan anytime, as most lenders will not charge you any penalty. In personal loans, on the other hand, prepayment of the loan often results in a penalty of up to 5% on the outstanding loan amount.

Suggested Read: What Types of Gold Items can be used for Gold Loans

As we conclude, it is clear that gold loans are one of the best alternatives when a personal loan is rejected. They come with simpler eligibility requirements, faster approval, flexible repayment options, lower interest rates, and minimal to zero processing fees or prepayment charges.

If you are looking to leverage your gold for a loan, Muthoot Finance can be a great option. From competitive interest rates and minimal documentation to fast disbursement, gold loans from Muthoot Finance offer it all. To know more, visit your nearest Muthoot Finance branch.