Gold Loan vs. Personal Loan: How to Choose Between the Two for Meeting Your Needs?

March 04, 2019

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From medical emergency to marriage function, there are several events in life when you might need funds that you don't readily have. A personal loan is one of the best ways to meet such financial emergencies. However, in the past few years, an increasing number of borrowers are relying on gold loans to meet such expenses.

If you too are looking for a loan and own gold jewellery, you might be faced with similar confusion between these two popular loan options. Comparing gold loan vs personal loan on some crucial factors can help you make the right decision.

1. Borrowing Limit

Lenders have their minimum and maximum borrowing limits for both types of loans. For gold loans, the limit usually ranges between Rs. 10,000 and Rs. 15 lakhs. If you go with a personal loan, the borrowing limit can range between Rs. 50,000 to Rs. 20 lakhs or even more. This borrowing limit varies between lenders.

So, if you are looking to borrow an amount higher than Rs. 15 lakhs, a personal bank loan is the go-to option. You can go for a gold loan for lower amounts.

2. Loan Duration

Loans against gold ornaments are short-term loans with a tenure of 6 months to 12 months. On the other hand, you can take a personal loan for a duration of 12 months to 60 months.

If you are only looking to manage a temporary financial emergency, a gold loan can be a great option. However, if you want to borrow a higher amount for a slightly longer duration, you can go with a personal loan.

3. Interest Rate

A gold loan is a secured type of loan as you are required to pledge your gold against the loan amount. However, a personal loan is an unsecured loan which does not require any collateral. As a result, personal loans are slightly more expensive than gold loans with respect to interest charged.

Most top lenders offer gold loan rate in the range of 10% to 16%. On the other hand, interest on a personal loan can range from 12% to 20%.

4. Additional Charges

The next important factor is the additional charges that you’re required to pay when you take the loan such as the processing fee. For a personal loan, this can be 2% or more of the loan amount. Even if you want to prepay a personal loan, the prepayment charges can be up to 5% or more.

The processing fee of a gold loan is generally around 1% of the loan amount. If you want to prepay or foreclose a gold loan, the prepayment fee too is around 1%.

5. Eligibility Requirements

The personal loan eligibility requirements are higher as it is an unsecured type of loan. The lender would check your monthly income, age, work experience, type of employment, and credit score before approving the loan.

As compared to a personal loan, the eligibility requirements of a gold loan are minimal. You only need to be 18 years or above in age and should be the legal owner of the gold that you want to pledge against the loan amount.

Selecting Between Personal Loan and Gold Loan

As you can see, there are considerable differences between a personal loan and a gold loan. The personal loan limit is higher, and even their tenure is longer as compared to gold loan. However, with a gold loan, you get a more attractive interest rate, minimum eligibility requirements, and lower additional charges.

As both the types of loans have their benefits and drawbacks, a borrower can select one basis of his/her requirements. If you need to borrow a higher amount for a longer tenure, go for a personal loan. However, if you own gold ornaments and need loans of up to Rs. 15 lakhs which you can repay within a short period, you can go ahead with a gold loan.

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