When faced with a financial need, choosing between gold loans and personal loans can be challenging. Both options provide quick access to funds with minimal documentation. Understanding the characteristics of each type of loan is essential for making an informed decision.
Gold loans are secured against your gold assets, allowing for a faster application process and quicker disbursal of funds. This makes them an attractive option for those with valuable gold items needing immediate cash. In contrast, personal loans are unsecured, meaning you don’t need to pledge any assets. This can be useful for borrowers who don’t have or prefer not to pledge assets. As you navigate your options, consider factors such as the urgency of your need, your ability to provide collateral, repayment capacity and long-term financial goals. This guide will help you explore the key considerations in selecting the right loan for your situation.
Interest rates
Gold loan interest rates are usually lower than personal loan interest rates due to the secured nature of the gold loan. For instance, the State Bank of India (SBI) offers personal loans starting at an interest rate of 11.45% p.a., while its gold loan rates begin at 9.05% p.a.
The interest rates for personal loans are based on several factors such as the applicant’s occupation, credit score, monthly income and employer’s profiles. On the other hand, for gold loans, lenders consider loan amount, repayment method and the specific loan scheme chosen to set the applicable interest rate. This difference in assessment criteria underscores the varied approaches lenders take when determining interest rates for each type of loan, ultimately affecting the cost of borrowing.
Turnaround time for loan disbursement
The loan approval and disbursement process for gold loans is usually quicker than that of personal loans. When applying for personal loans through offline channels, the disbursal time usually ranges from 2 to 7 business days. However, with the rise of digitalization and increasing online applications, many lenders are now able to disburse funds within a few hours. Customers with pre-approved offers can receive their loan amounts almost instantly. For instance, HDFC Bank claims that pre-approved applicants can have their loans disbursed within 10 seconds. For other applicants, the turnaround time can extend up to 4 business days.
In contrast, gold loans stand out for their quick disbursal, with loan the loan amount being disbursed within a few hours of making the loan application. HDFC Bank, for instance, claims to disburse gold loans within just 45 minutes of application submission. This speed makes gold loans an attractive option for those in need of immediate funds.
Loan amount
Personal loans usually range from Rs 50,000 to Rs 40 lakh, with some banks and Non-Banking Financial Companies (NBFCs) claiming to offer even higher loan amounts. The eligible loan amount largely depends on the applicant’s repayment capacity and the selected tenure. On the other hand, the gold loan amount is primarily based on the valuation of the gold pledged as collateral, as well as the loan-to-value (LTV) ratio applicable to the borrower. The Reserve Bank of India (RBI) has set a cap on the LTV ratio at 75%, meaning borrowers cannot avail more than 75% of the gold’s value as a loan. This difference in determining loan amounts highlights the distinct approaches used for personal loans and gold loans.
Chances of loan approval
The absence of collateral in personal loans increases the lending risk for the lenders as there’s no security to depend on in case of borrower default. To address this risk, lenders conduct a comprehensive evaluation of personal loan applications. They consider various factors, such as the applicant’s net monthly income, employer details, credit score and occupation. This thorough assessment can also determine the interest rates offered by some lenders based on the applicant’s credit profile.
On the other hand, gold loans are secured by the gold pledged as collateral, which provides lenders with a tangible asset to sell if the borrower fails to repay the loan. This significantly reduces their lending risk. As a result, when reviewing gold loan applications—especially from borrowers with lower credit scores—lenders tend to adopt a more flexible evaluation process. This distinction highlights the differing risk dynamics between personal loans and gold loans.
Loan tenure
In the case of personal loan, the repayment tenure usually ranges from 1 to 5 years, with some lenders offering extending up to 7 years. In contrast, gold loans generally have shorter tenures, usually capped at around 3 years, although some lenders may provide options for longer durations of 4 to 5 years.
Applicants should note that choosing longer loan tenures can result in higher overall interest costs even it allows for lower monthly EMIs. This makes personal loans a suitable option for those seeking larger amounts with more manageable EMIs. On the other hand, gold loans are ideal for borrowers who can comfortably repay their loans within a shorter time frame, given their lower selecting the right loans overall costs. Therefore, before making an application, individuals should align their loan choices with their financial capabilities and goals.
Processing fees
The processing fee of a personal loan usually is up to 4% of the loan amount. However, some lenders may waive or cap these charges at specific amounts. In contrast, gold loans usually have processing fees of around 1% to 2% of the loan amount. As these fees contribute to the overall cost of borrowing, individuals should take this into account when comparing personal loan and gold loan options. Understanding these charges can help individuals make more informed decisions about which loan best fits their financial situation.