Gold Loan Vs Personal Loan: Which financing facility should you go for?

Getting a loan is an ideal option when you require financial assistance, and there are numerous loan options to choose from. Some of the most common financing options individuals opt for is a personal loan or a gold loan. The best thing about these loans is that they do not come with any end usage limit on loan proceeds and have a shorter processing time, making it a preferred choice to meet financial shortcomings and emergencies. As a result, individuals with substantial gold holdings may find it difficult to choose between the two. However, both these loans vary from each other in terms of cost, ease of access, impact on credit score, and repayment flexibility. One needs to weigh both the options keeping all the requirements in mind before choosing one. Here are a few things to keep in mind that will help you make your decision.

Gold Loan

To get a gold loan, you must pledge gold jewellery, coins or gold bars, etc., with the lender as gold loans are backed with collateral in the form of the pledged gold item. The interest charged on a gold loan depends on the lender, the loan term, and size of the loan, ranging from 7% to 29% p.a. To apply for a gold loan, you need to submit the following documents:

• Identity proof (PAN, Aadhaar, Passport etc.)
• Address proof (Aadhaar, Voter ID card, etc.), and other documents required by the lender

The loan tenure for this loan varies from lender to lender and usually ranges between 3 months and three years. If you fail to repay the gold loan, the lender could use the pledged gold to recover the loan dues. The borrower has to pay processing fees, gold valuation charges, documentation fee, and foreclosure charges depending on your lender. You can avail of a gold loan as a term loan or in the form of an overdraft facility, so you get flexibility in terms of repayment choice.

Personal Loan

Getting a personal loan is a good financing option if you’re dealing with a high-interest debt or other expenses. You can use the loan amount to fulfil a variety of financial issues with ease. Moreover, the interest charged on this loan is typically lower compared to credit cards. Unlike other loans like a car loan or a home loan, you can use this loan for multiple purposes; you can use the loan amount for almost any reason. To avail a personal loan the borrowers need to submit the following documents:

For Salaried Individuals:

• Identity Proof: PAN Card/Aadhaar Card/Passport/Voter ID/Driving License
• Proof of Residence: Voter ID/Aadhaar Card/Passport/Driving License/Electricity Bill/Telephone Bill
• Income Proof: Bank statement or salary slips of the last three months
• Passport Size Photographs

For Self-Employed Individuals:

• Identity Proof: PAN Card/Voter ID/Aadhaar Card/Passport/Driving License
• Proof of Residence: Aadhaar Card/Voter ID/Passport/Driving License/Electricity Bill/Telephone Bill
• Income Proof: Bank statement of the last three months
• Passport Size Photographs
• Office Address Proof: Electricity Bill/Landline Bill/GST or VAT Registration

However, the documentation required is likely to be slightly different for salaried and self-employed personal loan applicants. The lenders usually ascertain the appropriate loan amount and interest rate after a personal loan eligibility check.

Which option is better?

• Collateral: If you possess sufficient assets and pledge it to get a loan, a gold loan could be a better option for you, as you can get lower interest rates on the loan amount, you also have the option of applying for an unsecured loan like a personal loan.
• Loan Amount Requirement: Gold loan requires security as collateral, but if the value of your gold items is lesser than your loan requirement and you need a considerable loan amount, you can opt for a personal loan to get the loan amount you seek.
• Credit Score: An individual with a low credit score might not be eligible for a loan. Even if he/she is suitable, the interest rate charged on loan will be much higher than those extended to applicants with stellar credit scores (750-800). In such a scenario, a gold loan is a better option for you.
• Monthly Income: Getting a personal loan could be difficult if you lack a steady source of income. A gold loan is an ideal option because credit scores have lower importance on such loans.

When it comes to choosing between the loans, it is based on the borrower’s needs and credit profile. Personal loans will be more suitable if you require more significant loan amounts for a longer tenure. Gold loans will primarily suit individuals that require greater flexibility in loan repayment or have low credit profiles to qualify for loans at reasonable rates.