Personal loan Vs gold loan: What should you choose and why? Check 5 key differences | Mint

If you are falling short of money and currently exploring different means of raising funds then you can, among a slew of options, consider raising a personal loan. However, one of the key disadvantages of raising a personal loan is that it carries a high rate of interest. The other alternative, meanwhile, is to raise a gold loan which, typically, levies a lower rate.

To procure instant loan at a lower rate, therefore, one has to give jewellery as collateral. Let us elaborate more on the key differences between the two forms of instant loans.

Key differences between personal and gold loan

1. High rate of interest: Typically, gold loan is offered at a lower rate of interest (say 9-10 percent) whereas personal loan interest rates are higher between 11 to 18 percent per annum.

2. Collateral on loan: By definition, gold loan requires gold bars or jewellery as collateral, whereas personal loan is unsecured form of loan. So, there is no risk of an asset loss in case of delay or default. However, one stands to lose credit score in case of delay or default in the payment of instalment.

3. Discretion of lender: Raising a gold loan is super easy. The lender only checks the genuineness of asset before ascertaining its value. Then the loan amount is decided which can not be more than 75 percent of the value of asset. The LTV (loan to value) is capped at 75 percent by the RBI.

At the same time, raising a personal loan is not time consuming either. But the decision is usually taken on the basis of an interplay of factors which include applicant’s credit score, monthly salary, record of employment and age.

4. Proportion to income: Gold loan is given on the basis of gold’s value and in case borrower fails to repay the loan with interest, the asset is typically forfeited by the lender. It’s incumbent upon borrower to arrange funds to be able to repay the loan.

On the other hand, personal loan is disbursed on the basis of income alone. And banks exercise caution to ensure that the EMI burden is not more than a certain threshold of salary, usually 50 percent of monthly salary.

Since personal loans are unsecured, banks are usually wary to dole them out to anyone, so they take a decision based on the borrower’s income. The same does not apply to gold loans, which are secured.

5. Purpose of loan: Thanks to the ready availability of personal loans, they can be raised for a range of purposes — be it for marriage, or to buy a luxury item or to go on a vacation. Any sudden expense can be met with the money raised via personal loan.

On the other hand, gold loan is typically meant for emergency purposes. Most gold ornaments and jewellery are family heirlooms and it is not considered good to give them for collateral for meeting any non-urgent expense.