Financial emergencies often strike without warning, whether wedding expenses or medical emergencies. In such times, taking a loan is a common solution to meet immediate cash needs. The quickest and easiest options are gold loans and personal loans. While choosing between these two, it is important to understand the interest rate, process, and advantages and disadvantages. Let’s compare these two options.
Gold Loan: What is it and how does it work?
Gold loan is a secured loan in which you pledge your gold (jewellery or coins) as collateral. Banks or financial institutions provide loans up to 75-80% of the market value of your gold.
Key Features of Gold Loan:
- Secured loan: Given against collateral.
- Fast Approval: Loan processing is completed in 90 to 120 minutes.
- Tax Benefits: If the loan is used for construction, renovation, or purchase of a residential property, there are deduction benefits under the Income Tax Act.
Benefits of Gold Loan:
- No credit score required: Easy option for those with low credit scores.
- Usage of funds: No restrictions on usage of funds on gold loan.
- Lowest Interest Rates: Interest rates are generally low (starting from 7.7% per annum).
Disadvantages of Gold Loan:
- Risk of mortgaged property: The lender may sell your gold if you fail to repay the loan.
- LTV Limited: Loan available up to maximum 80%.
Personal Loan: What is it and how does it work?
Personal loan is an unsecured loan in which you do not require collateral. Your credit score, income, and job stability are the main factors to get a loan.
Key Features of Personal Loan:
- Unsecured Loan: No collateral required.
- Flexibility: Can be used for any purpose.
- Credit score based: The better the credit score, the higher are the chances of getting a loan.
Benefits of Personal Loan:
- No collateral required: Loan is available without security.
- Freedom of Use: It can be used for marriage, education, loan repayment, or any other personal need.
- Opportunity to improve credit score: Timely EMI payment improves your credit score.
Disadvantages of personal loan:
- Higher interest rates: Interest rates are higher than gold loans (10.5%-36% per annum).
- Fees and penalties: Costs can increase due to processing fees and late payment penalties.
- Dependence on credit score: Applicants with poor credit scores find it difficult to get a personal loan.
Gold Loan vs Personal Loan: A Comparative Analysis
| parameters | gold loan | personal loan |
|---|---|---|
| interest rates | 7.7%-12% per year | 10.5%-36% per year |
| collateral | necessary (gold) | not necessary |
| Processing Time | 90-120 minutes | 48-84 hours |
| loan amount | up to ₹25 lakh | ₹50,000 to ₹20 lakh |
| credit score | not mandatory | Mandatory |
| range of use | no limit | objective based |
Interest Rates Comparison (Major Institutions)
Gold Loan:
- SBI: Starting from 9.8%, ₹20,000 to ₹20 lakh.
- HDFC: Starting at 12.04%, from ₹50,000 to ₹50 lakh.
- ICICI: Starting at 11%, from ₹10,000 to ₹15 lakh.
- Canara Bank: 11.95%, ₹10,000 to ₹10 lakh.
Personal Loan:
- HDFC Bank: Starting from 10.85%.
- ICICI Bank: Starting from 10.85%.
- Axis Bank: Starting from 11.25%.
- Federal Bank: Up to 12%-19.5%.
Which loan to choose?
- Choose Gold Loan if:
- You have gold to pledge.
- You want money quickly at a low interest rate.
- Your credit score is low.
- Choose Personal Loan if:
- You don’t have collateral.
- You want a multi-purpose loan.
- Your credit score is good.
