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Personal Loan vs Gold Loan

Personal Loan vs Gold Loan

The paperwork involved in availing a personal loan is not elaborate at all, as long as you furnish your KYC to the bank and comply with the basic eligibility parameters.

Few financial products can match the flexibility and versatility of a personal loan. However, the emergence of secured gold loans bodes well for the loan scape, considering these entail quick disbursal and easy documentation.

That being said, both these loans have their own share of pros and cons, something that makes a detailed analysis all the more important. Read on to know more about how exactly a gold loan differs from a personal loan, in keeping with their advantages and drawbacks.

What is a Personal Loan?

A personal loan is unsecured, essentially implying that it doesn’t warrant you to pledge any asset (personal or business) on the line to avail the product. You can take out a personal loan and use it to meet an array of personal and professional requirements - be it buying the latest electronic appliances, funding a medical urgency in the family, shelling out wedding related expenses, financing your child’s higher education expenses, consolidating all past debts into one single payment and much more.

Eligibility criteria for a personal loan depends on factors, including a good credit score (generally 750 or more is deemed good), age, steady monthly income, employment status, etc.

The Pros

- Zero collateral: Should you wish to take out a personal loan, you would not have to pledge personal or business assets as collateral. This feature makes it a top-bracket loan in times of dire urgency when arranging for collateral can become problematic.

- Versatility: There isn’t much that a personal loan cannot do, with its scope ranging across financing home renovations, funding medical obligations, consolidation of past debts, paying up for wedding or other big-ticket expenditure, and more.

- Simple documentation: The paperwork involved in availing such a loan is not elaborate at all, as long as you furnish your KYC to the bank and comply with the basic eligibility parameters.

- Quick disbursal of funds: Approval and disbursal of funds can be lightning quick, with many banks crediting funds to your account within as less as 24-48 hours.

The Cons

- Stringent prerequisites (credit history and credit score): Since a personal loan is not secured by any asset, banks would want to be thoroughly assured of your repayment capability before approving the loan. This is the reason why banks launch a stringent probe into your history of credit management and current credit score in order to arrive at your financial viability.

- Comparatively higher rates of interest: Being unsecured in nature, banks look at personal loans as slightly riskier options as opposed to loans that are secured by collateral. This is why these loans are subject to comparatively higher interest rates.

What is a Gold Loan?

Idle assets such as gold jewelry (or gold biscuits, bars and coins, for that matter), when tucked away safely inside a locker, don’t yield any return. Gold loans, sanctioned on the basis of purity of the gold, are a medium to utilize these idle assets in times of need.

Gold loans are essentially secured in nature, the reason why they attach relatively cheaper interest rates. The very premise of such loans is based on the condition that you would be providing security against the loan amount by pledging your gold.

The Pros

- Fast processing: Banks usually only look at the necessary documents prior to sanctioning a gold loan. This makes the approval process less cumbersome, coupled with money-in-bank guarantee within a few hours in many cases.

- Credit history not a necessary clause: Your credit score isn’t one of the important parameters that would affect approval of a gold loan. That being said, it is always advisable to check your credit score from any credit rating agency and take corrective action to improve it, if necessary,

- Lower rates of interest: Being a secured loan, gold loans are generally subject to lower rates of interest as opposed to other similar financing instruments.

- No prepayment fees: Unlike a personal loan, you would not have to shell out any additional fees for the foreclosure of a gold loan.

The Cons

- High margin retained by the bank: Generally, a bank would sanction a gold loan up to almost 75% of the total gold value. This implies that the pending 25% is the margin that’s retained by the bank.

- Secured by collateral: You would have to pledge assets as security in order to avail a gold loan. This means that the bank retains the absolute right to retain ownership of the asset and sell it off to recover dues, should you fail to repay the debt in full.

- Shorter tenure: On most occasions, a gold loan is sanctioned for a maximum tenure of up to 3 years. Considering the loan amount to be on the higher side, such a tenure can scale up the monthly installments payable towards the loan (EMIs). Prior financial planning, therefore, will be the need of the hour in such a situation.

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This content has been created in association with YONO SBI.

first published:March 28, 2019, 13:06 IST