No matter where we come from or what we do, we all experience financial challenges at times—and sometimes, borrowing money becomes an unavoidable part of getting by. It could be for covering an unexpected expense or funding a long-awaited purchase, choosing the right loan is extremely important for your financial health. Gold loans and personal loans are two popular options, but they serve different purposes, come with varying terms, and offer distinct benefits and risks.
But, how do you decide between these two when the stakes are high?
You may have a stash of gold tucked away or you might rely on your strong credit score, but reading this blog will help you understand which loan is best suited to your needs, urgency, and risk tolerance.
Table of Contents
What is a Personal Loan?
A personal loan doesn’t ask you to risk what you’ve worked hard for i.e. - pledging collateral. Instead, lenders look at your credit history, income, and ability to repay, making sure you’re not taking on too much. A debt-to-income ratio of under 40% shows that you can comfortably handle your payments, giving you peace of mind in managing your finances.
Instant personal loans provide the freedom to fund a wide range of needs, such as medical treatments, home improvements, or any unexpected urgent financial requirements.
Why consider a personal loan?
Personal loans are attractive for borrowers who can’t afford to risk their valuable assets but need quick access to cash. You can apply online and receive approval in a few hours. The terms for loans for travel and other purposes are fixed, with a set interest rate and monthly repayment schedule, making it easy to manage.
Personal Loan: Pros and cons
Pros:
- No Collateral:
Personal loans don’t require any asset as security, making them ideal for those who don’t want to risk valuable possessions.
- Flexible Usage:
You can use the loan for a wide range of purposes—be it medical bills, vacations, or educational needs—without restrictions.
- Fixed Repayment:
The fixed monthly installments over a set period make it easier to plan your budget and track payments.
- Quick Approval:
Personal loans are often processed quickly (within 24 hours to a week), allowing fast access to funds.
Cons:
- Higher Interest Rates:
Interest rates tend to be higher compared to secured loans, typically ranging from 8.5% to 13.6% annually.
- Credit Score Requirement:
A strong credit score is often required for approval and better interest rates. Poor credit may lead to higher interest rates or rejection.
- Processing Fees:
Processing fees, which can range from 1% to 6% of the loan amount, can add up and raise the total cost.
- Credit Score Impact:
Missing payments or carrying high balances can negatively impact your credit score, affecting your future borrowing capacity.
What is a Gold Loan?
A gold loan is a type of secured loan in which the gold is given as a collateral and the loan amount is dependent on that value. Gold bars, coins, or jewellery could be examples of this. Since the loan amount is between 75% and 80% of the gold's market value, many borrowers find it to be a quick and convenient option.
The important thing to note here is the lender holds your gold until you repay the loan. You get your gold back when you pay back the loan. If you fail to repay, however, the lender may seize your gold.
Why choose a gold loan?
For those who find themselves in a tight spot financially, a gold loan can offer a lifeline, especially if your credit history isn't the best. You don’t have to wait long to access the funds, with approval often taking just 90 minutes to two hours.
Gold Loan: Pros and Cons
Pros:
- Quick Disbursal: Approval can happen in as little as 90 to 120 minutes, making it a great option for emergencies.
- Low Interest Rates: Gold loans generally have lower interest rates (around 7.7%) compared to personal loans, as they’re secured.
- Minimal Documentation: No lengthy paperwork or credit checks are required, making it hassle-free for people with poor credit histories.
Cons:
- Risk of Losing Gold: If you default on the loan, you risk losing your pledged gold, which can be a significant downside.
- Loan Amount Limit: The loan amount you can get is capped at 80% of the gold’s market value, limiting how much you can borrow.
- Shorter Repayment Period: Gold loans usually have shorter repayment tenures, ranging from 12 to 36 months.
Difference Between Gold Loan and Personal Loan: Key Insights
With an estimated 22,000 metric tonnes of gold held by the general public, gold loans are very common in India because of the enormous value of gold in Indian households. The loan amount fluctuates based on current gold rates so the timing of getting a gold loan matters a lot.
However, as of 2023, the growing demand for unsecured credit from consumers has caused the personal loan market in India to expand substantially reaching about ₹2.5 lakh crore. Recent surveys show that almost 40% of borrowers use personal loans to consolidate their debts, which makes it easier for them to manage several high-interest debts. These loans are also used by others to finance education (15%), home improvements (20%), and medical emergencies (25%).
Why Does This Matter? What Does This Data Mean?
The distinction between secured and unsecured loans impacts several aspects.
For instance, gold loans generally come with lower interest rates, ranging between 7-15% p.a., and faster approval, often disbursing the loan in under 24 hours. In fact, according to the Indian government’s data, gold loans are disbursed 50-60% faster than personal loans, making them a viable option in emergency loans.
The drawback of a gold loan is that you run the risk of forfeiting the gold that was pledged. Given that the loan-to-value ratio may be high for larger sums of money, this risk is higher and puts the borrower in a more vulnerable position if repayment is delayed.
Therefore, the final decision should be dependent upon the speed of disbursement and the interest rate that you must pay, irrespective of your varied needs.
How to Choose Between a Personal Loan and a Gold Loan?
Your financial situation, risk tolerance, and loan goals must all be taken into account when deciding between a personal loan and a gold loan. To help you, consider the following thought-provoking questions:
Do You Have Gold Assets?
If you own gold—whether in the form of jewelry, coins, or even bars—you have a strong collateral option to secure a gold loan. These loans for women are an excellent choice in need of quick funds, especially when time is of the essence. India ranks among the top gold-holding countries in the world, making gold loans a natural and accessible financing option.
Are You Risk-Averse?
If you're someone who values security above all, pledging your gold as collateral might feel uncomfortable. In this case, a personal loan would be the more attractive option, as you don't risk losing any tangible assets. However, these loans require a credit score of at least 685 and a stable income to ensure approval.
What’s Your Credit Score?
Your credit score plays a pivotal role in deciding which loan is more suitable. With an excellent credit score (750+), you may secure a personal loan at more favourable terms and avoid the hassle of gold appraisal or collateral evaluation. But if your credit score isn’t as amazing, a gold loan could be your best option. Since gold loans don’t depend on your credit history but rather the value of the collateral, they can provide much-needed financial support even with a low score.
What’s the Loan Amount You Need?
Gold loans can cover up to 80% of the market value of the metal, albeit the loan amount is dependent on shifts in the price of gold. This can be advantageous if you need a quick loan for a lower amount. However, personal loans offer more flexibility, with loan amounts ranging from ₹50,000 to ₹20 lakhs, depending on your eligibility. For larger loan requirements, especially for major purchases like loans for education, weddings, etc, personal loans are a more appropriate option.
Conclusion
Choosing between a gold loan vs personal loan ultimately boils down to your unique financial circumstances. Gold loans are fast, secured, and relatively cheaper in terms of interest rates. They do, however, carry the risk of losing your valuables. Personal loans are great for those who don’t want to pledge collateral but are willing to pay higher interest rates.
Think about your immediate need for funds, how much you can afford to repay, and the amount of risk you're willing to take. Creditt+ offers salaried employees quick personal loans ranging from INR 10,000 to 35,000, making it easier for you to meet your financial needs when life calls for it. With our right guidance and genuine onboarding you can take a breath of relief from your burdens. Contact us today to learn more.
