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Know the key differentiating factors between Personal Loans and Gold Loans to make an informed decision for better money management and financial success.
Nowadays, procuring a loan is so simple that it’s become our go-to solution to save the day in times of crisis when you don't have access to cash or haven't saved money for a rainy day. The difficulty arises when deciding which loan is ideal for you - Gold Loans or Personal Loans
If you've to take out a loan urgently, you have two primary options: a gold loan and a personal loan.
But, before you choose one of these loans, there are many factors to consider when it comes to interest rates, security, charges, etc.
Therefore, it is crucial to know the benefits and drawbacks of both options when choosing between a gold loan and a personal loan so that you can make an informed decision.
Let's first explore the primary difference between the two types of loans:
What is Gold Loan?
A gold loan is a secured loan that you can get by pledging your gold jewellery as collateral.
The lender will assess the value of your gold and give you a loan amount a certain percentage of the Gold value as loan based on LTV ratio. The interest rate on gold loans is typically lower than other types of loans, such as personal loans or credit card loans.
What is Loan-to-Value (LTV) ratio for Gold Loans?
Loan-to-Value ratio, is the percentage of the value of an asset that a lender is willing to loan against. In the case of gold loans, the LTV ratio is the percentage of the value of the gold that the lender is willing to loan against.
The Reserve Bank of India (RBI) has set the maximum LTV ratio for gold loans at 75%.
This means that lenders cannot lend more than 75% of the value of the gold that is pledged as collateral. However, during the COVID-19 pandemic, the RBI temporarily increased the maximum LTV ratio for gold loans to 90%. This was done to help borrowers who were facing financial difficulties due to the pandemic.
The LTV ratio is an important factor to consider when applying for a gold loan.
A higher LTV ratio means that you can get a higher loan amount against the same amount of gold. However, it is important to note that a higher LTV ratio also means that you will be taking on more risk. If you fail to repay the loan, the lender may sell your gold to recover the loan amount.
Advantages of Gold Loan
- Lower interest rates: Gold loans typically have lower interest rates than personal loans, as they are secured loans. The interest rates for gold loans in India are currently in the range of 8-12%, while the interest rates for personal loans are in the range of 10-18%.
- Lower documentation: The documentation requirements for gold loans are also lower than those for personal loans. You will typically need to provide proof of identity, address, and income, as well as a valuation of your gold jewellery.
- Faster processing: Gold loans can be processed faster than personal loans, as the lender has the collateral of your gold jewellery. The processing time for gold loans is typically 1-2 weeks, while the processing time for personal loans can be up to 4 weeks.
- Flexible repayment options: Gold loans offer more flexible repayment options than personal loans. You can choose to repay the loan in EMIs (equal monthly installments) or bullet payments (a lump sum amount at the end of the loan term).
Disadvantages of Gold Loan
- Risk of losing your gold: If you fail to repay the loan, the lender may sell your gold jewelry to recover the loan amount.
- High interest rates: Gold loan interest rates can vary depending on the lender and the loan amount. It is important to compare interest rates from different lenders before choosing a loan.
- Loan amount: The loan amount you can get on a gold loan is limited to 75% of the value of your gold jewelry.
- Storage fees: Some lenders may charge storage fees for storing your gold jewelry while you are repaying the loan.
What is Personal Loan?
A personal loan is a type of loan that can be used for any purpose.
Personal loan is an unsecured loan, meaning that you do not need to pledge any collateral to get the loan. Personal loans are typically offered by banks, credit unions, and online lenders.
To apply for a personal loan, you will need to provide the lender with some basic information, such as your name, date of birth, Social Security number, and income.
The lender will also review your credit history to determine your eligibility for a loan and your interest rate.
Once your loan is approved, the lender will disburse the loan amount to you.
You will then need to repay the loan amount, plus interest, in monthly installments. The repayment term for personal loans typically ranges from one to seven years.
Advantages of Personal Loan
- Higher loan amount: The loan amount for a personal loan is typically higher than the loan amount for a gold loan. This is because the lender does not have to factor in the risk of the gold jewellery losing value.
- No collateral required: You do not have to pledge any collateral for a personal loan. This means that you do not have to worry about losing your assets if you default on the loan.
- Longer repayment tenure: Personal loans typically have a longer repayment tenure than gold loans. This can be helpful if you are unable to repay the loan in a short period of time.
Disadvantages of Personal Loan
- Interest rates: Personal loan interest rates can vary depending on the lender and your credit history.
- Loan amount: The loan amount you can get on a personal loan is limited by your income and credit history.
- Fees: Some lenders may charge additional fees for personal loans, such as origination fees and prepayment penalties.
Key Differences between Gold Loan and Personal Loans
Gold assets, such as coins, bars, jewelry, etc, can be pledged as security for a gold loan.
The loan's value is based on the gold's actual weight, as determined by the lender. After you pay off your loan, the lender gives back your collateral.
A personal loan is a secured loan wherein you do not need to provide collateral.
It is common practice for lenders to evaluate your eligibility based on your income, occupation, and credit score.
Today, applying for a personal loan is as simple as filling out an internet form.
The other key differentiating factors are -
1. Loan Amount
While financial institutions provide significant personal loan amounts, they almost always have a maximum allowable limit, over which borrowers are not permitted to borrow money.
When it comes to gold loans, there isn't a predetermined maximum amount that a borrower can be given.
However, according to the Reserve Bank of India, a lender is only allowed to grant a loan for up to 75% of the gold's worth based on its current market price.
Personal loans must be repaid in Equated Monthly Installments (EMIs), which include both the principal and interest portions of the loan.
However, when you use a gold loan you get different alternatives for repayment.
You either have the option of paying simply the loan's interest component over the loan period, or you can pay the total interest amount when the loan is disbursed.
Alternatively, you can repay the principal amount in either scenario when the loan ends. Timely repayment of personal loans and gold loans can help improve your CIBIL score
3. Loan tenure
Depending on the lender, personal loan payback terms can range from three to five years. In comparison, you have only three years to repay the gold loan you took.
If you cannot repay the loan within the allotted time, you should inquire with your lender about any gold loan extension programs that may be available.
4. Documents and time to process
When applying for a personal loan, borrowers are not obliged to offer any collateral; however, when applying for a gold loan, gold holdings can be used as collateral, and the loan would still be accepted.
People having trouble making ends meet may often ask for personal or gold loans since the lenders can process these applications very rapidly.
However, in addition to the application for the loan, they are required to produce the necessary paperwork, such as documentation of their income and residence, among other things.
Gold loans are more effective in disbursing funds than personal loans, even though the application procedure for gold loans is time-consuming.
Most lending institutions will review the applicant's income verification paperwork to see whether they meet their requirements.
Consequently, they keep the processing fees for personal loans to a minimum.
Processing fees for personal loans can be anywhere from half a percent to one percent of the total amount borrowed.
This figure does not take into account the expenses of processing.
When applying for a gold loan, borrowers are not required to present paperwork proving their income because they are utilizing their gold assets as security for the loan.
This is in contrast to most other types of loans.
5. Flexible Repayment Options
The borrower will be able to circumvent the majority of the restrictions placed on their ability to repay the loan by opting for an EMI payment plan with either a personal or a gold loan.
In contrast to personal loans, gold loans typically come with a wider variety of flexible repayment options.
Since secure loans guarantee you will make payments on time, they are more flexible to their customers.
Gold loan borrowers have many different options for making their repayments.
Borrowers of a gold loan need to select the regular EMI payment option to satisfy the terms of the loan's repayment.
They also have the option of repaying the interest accrued during the loan period and making the payment on the principal amount at the end of the term of the mandate.
At the end of the repayment period, borrowers can make a single payment that covers both the principal and the interest accrued on loan.
You have a better chance of repaying off your debt if you take out a gold loan since these loans provide alternatives to improve your capacity to make repayments.
Which one's better for You - Gold Loan or Personal Loan
Is a loan secured by gold a better option for you than a personal loan?
You can submit an application for a gold loan if you have gold assets and a pressing need for cash simultaneously.
Personal loans are your best option regarding greater loan amounts and longer payback periods.
Personal loans are ideal when you need money quickly but don't want to be tied down to making payments for a short period or a large sum.
You might consider applying for a personal loan if you have a consistent income and a strong credit history.
However, both of these loans have their share of advantages and disadvantages.
Therefore, it is essential that you evaluate your circumstances and have a solid understanding of the distinctions between a personal loan and a gold loan.
Which loan option is best for you will depend on several factors, including how much money you need, how long you need to pay it back, and how comfortable you are mortgaging gold as collateral.
No matter what you need money for, a Gold Loan or a Personal Loan will assist you. Instant Personal Loans are a viable option since they may provide access to your funds in as little as 24 hours.
FAQs about Gold Loan Vs Personal Loan
Q) Is Gold Loan taxable?
Answer - If you are not using the gold loan to purchase or construct a residential property, or if the loan amount is more than Rs. 35 lakhs, then the interest paid on the loan is not taxable.
However, you may be able to claim a deduction for the interest paid under other sections of the Income Tax Act, such as Section 37(1).
You should consult with a tax advisor to determine if you are eligible to claim a tax deduction on the interest paid on your gold loan.
Q) Is Personal loan Tax free?
Answer - Personal loans are generally not tax-free in India.
The interest paid on personal loans is not considered a deductible expense under the Income Tax Act, 1961. This means that you cannot reduce your taxable income by the amount of interest you pay on a personal loan.
However, there are a few exceptions to this rule. For example, if you use a personal loan to finance a business venture, then the interest paid on the loan may be deductible as a business expense.
Additionally, if you use a personal loan to pay for medical expenses, then the interest paid on the loan may be deductible as a medical expense.
If you are unsure whether you are eligible to claim a tax deduction on the interest paid on your personal loan, you should consult with a tax advisor.
Q) Can we close gold loan early?
Answer - Yes, you can close a gold loan early in India.
To close a gold loan early, you will need to contact your lender and inform them of your intention to prepay the loan. The lender will then calculate the prepayment penalty and tell you the total amount you need to pay to close the loan.
Once you have paid the prepayment penalty and the outstanding loan amount, the lender will release your gold jewellery back to you.
Q) What is Personal loan Vs Gold loan interest rate?
Answer - Personal loan interest rates are typically higher than gold loan interest rates.
This is because personal loans are unsecured, meaning that the lender does not have any collateral to seize if the borrower defaults on the loan.
Gold loans, on the other hand, are secured loans, meaning that the lender can seize the gold if the borrower defaults on the loan.