Gold Loan vs Personal Loan - Which is Better & Why?

09 Feb 2022

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Financial contingencies generally come unannounced. Often, the only way to tide over such contingencies is by taking a loan. Whether you need to fund your sister’s marriage, or pay for a medical emergency, a loan can prove to be a lifesaver. While many types of loans are available in the market to meet your needs, personal loans and gold loans are two of the most popular ones.

Now, how does one choose between a gold loan and a personal loan. To help you arrive at the answer to that, this article will take you through a gold loan vs personal loan comparison.

Read on to know more about gold loan vs personal loan interest rates and the basic difference between gold loan and personal loan.

We’ll start off by defining each of these two types of loans.

What is Gold Loan?

A gold loan is a type of loan in which you need to pledge your gold assets in the form of jewellery or coins as collateral. Typically, up to 75%-80% of the total gold value is offered as a loan, based on the current market value and quality of gold. The loan amount is calculated on the basis of the Loan to Value (LTV) ratio. You can repay the loan through monthly instalments. Once the loan has been cleared, the lender will return the gold that was deposited. Most people are confused about whether a gold loan is secured or unsecured loan in nature. Since a gold loan is offered against collateral which is your gold, it is a secured loan.

There are no gold loan tax benefits unless you use the funds towards home improvement, for the construction or purchase of a residential property or as a business expense. In the case of home improvement, you can avail of tax deduction under Section 80C of the Income Tax Act, 1961. This deduction is meant for the principal amount and is capped at Rs. 1.5 lakhs per year. If the loan is used for the purchase/construction of a residential property, you can claim a tax deduction of up to Rs. 2 lakhs in a year under Section 24 of the Income Tax Act, 1961.

Benefits of Gold Loan

  • Unlike other secured loans like a home loan or car loan, there is no restriction on the end use of gold loans
  • Most banks and financial institutions offer gold loans at affordable interest rates
  • The loan approval and disbursal processes are swift and hassle-free
  • You do not need a good credit history to get a gold loan

One of the major drawbacks of gold loans is that if you are unable to repay the loan, the lender upholds the legal right to liquidate your gold to recover the money. Secondly, when you avail of a gold loan, the LTV ratio varies from lender to lender. The maximum amount that you can get is up to 80% of the value of the pledged gold. For instance, if the market value of your gold is Rs. 5 lakhs, you can get a maximum loan of up to Rs. 4 lakhs.

What is Personal Loan?

A personal loan is an unsecured loan. This means that you do not have to provide collateral to get funds. As long as the lender considers you creditworthy, you will be eligible for a loan. Depending on the lender’s policy, you need to prove your eligibility based on your income, repayment capacity, nature of employment, and credit history, among other factors.

Benefits of Personal Loan

  • You can get the loan without a security deposit or collateral, making it a less risky form of financing
  • Interest rates are significantly lower than other unsecured loans like credit cards
  • Personal loans can be used to consolidate smaller high-interest debts by combining all outstanding payments into a single monthly payment
  • Personal loans can be used to improve your credit score in case you have different types of existing credit

A significant disadvantage of personal loan is that it attracts fees and penalties that can increase the cost of borrowing. Depending upon your lender, you may have to cough up processing fees ranging anywhere from 1% to 6% of the loan amount. Secondly, getting a personal loan at a low-interest rate totally depends on your credit score. This means that if you have a poor or low credit score, it is unlikely that you will stand a chance to get a personal loan. Also, if you have ever missed paying your Equated Monthly Instalments (EMI) on a previous lending product, it may be problematic for you to get the loan you want.

The tax benefits on personal loans are similar to that of a gold loan. While you cannot directly avail of a tax deduction on a personal loan, you are eligible to claim tax depending on where you use the funds.

Gold Loan or Personal Loan - Which is better?

Let us analyse how both these loan options stack up against each other through a variety of parameters:

Parameters Gold Loan Personal Loan
Loan Amount Up to Rs. 25 lakhs Rs. 50,000 to Rs. 20 lakhs
Interest Rates 7.7% per annum onwards 8.50% - 13.60% per annum
Processing Time Can be sanctioned in 90 to 120 min Can take anywhere from 24 hours to 7 working days
Loan Tenure 12 months to 36 months 48 months to 84 months
Eligibility
  • Individuals applying for the loan should be the owners of the gold ornaments or specially minted gold coins sold by banks
  • The maximum limit is up to 50 gm per borrower
  • Borrower should be an Indian resident
  • Borrower should be aged between 21 and 65 years
  • They must be a resident of India
  • They should be employed by an MNC, private or public limited company, Govt etc.
  • A minimum CIBIL score of 701 is required
  • KYC documents Aadhaar/PAN/Passport/Voter’s ID Card
  • 3-months’ salary slips/ IT Returns needed
  • 3-months bank account statement needed
Repayment Equated Monthly Instalments (EMIs) need to be paid monthly. The principal can be repaid by way of a lump-sum payment at any time during the tenure of the loan. EMI needs to be paid on monthly basis.
You can generally foreclose or prepay your loan 6 months after the date it has been disbursed, without any prepayment penalty.
Processing fee No processing fee for loans up to Rs. 25,000. Loans from Rs. 25,000 up to Rs. 25 lakhs will have applicable charges + GST. 2% of the loan amount subject to minimum of Rs.1,000 and maximum of Rs.10,000.

As we can see, the choice between a personal loan or a gold loan completely depends on your needs and financial profile. A gold loan is ideal for those with a poor credit history and gold to spare as collateral. However, if you have no gold to pledge, a personal loan will suit you better. Moreover, if you need a longer tenure to repay your loan, personal loans would be the better choice. However, if you are confident of paying off your loan within a shorter span of time, a gold loan can prove more cost-effective in the long run.

Conclusion

Personal loans and gold loans can both help you manage urgent and important expenses, whether planned or unplanned. Bank of Baroda offers personal loans and gold loans at attractive interest rates. You simply need to make the choice of which type of loan suits your requirement and repayment capacity. Get in touch with us today to take care of all your financing needs.

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