Gold Loan vs. Personal Loan: Which Is Better?

Everyone needs financial assistance from time to time, and there’s no shame in searching out loan options to get it. However, there are many borrowing options out there, and you might be having trouble deciding between them.

Borrowers typically use gold loans and personal loans for emergency cash infusions because of their quick loan disbursal and lack of restrictions on end-use loan proceeds. While they check for poor credit scores during the gold and personal loan applications, credit-worthiness is less of a factor here than with more high-profile loans.

Below we’ve provided a comprehensive comparison of personal loans and gold loans so that you can make an informed decision on which would be better during an emergency.

Definition of a Gold Loan and Personal Loan

Gold Loan - You get a better idea of what a gold loan is when they’re referred to by their other name: a “loan against gold.” Essentially, the borrower puts up their gold assets and is granted a percentage of that piece’s value as the loan amount, creating what’s called a secured loan. From there, the borrower pays monthly installments until they pay off the loan, at which point the lender returns the gold deposited.

Personal Loan - A personal loan (such as a signature loan) works similarly to a gold loan, except it’s an unsecured loan, meaning they are without the benefit of collateral. Without putting something to guarantee repayment, the loan amount will generally be much lower, and it will be harder for the loan applicant to gain loan approval.

During the application process for both loans, the loan agent will examine the applicant’s credit profile, but it’s typically not as much of a factor in approving gold loans.

Gold Loan vs. Personal Loan

Interest Rates

Lenders charge higher interest rates according to the payout for a loan. For example, gold loans tend to have greater payouts than personal loans or other unsecured loans, so their interest component skyrockets.

On average, a gold loan interest amount can vary between 7.5% to 29%. In contrast, personal loans range from 9% to 24%. However, risk assessment plays a large part in the interest rate for a loan. Gold loans have lower interest rates because they’re a secured loan; the borrower is putting up collateral to reduce their risk of non-payment. At the same time, personal loans will ultimately have a higher interest cost because of their unsecured nature

Loan Tenure

The loan tenure is the period the lender gives to the borrower to pay off the loan. Personal loans tend to have terms ranging from one to five years, while gold loans give much shorter repayment periods ranging from three years to as little as seven days, depending on the loan amount.

While higher loan terms give you more breathing room to pay off your debt, it also allows time for interest to accrue, increasing the overall amount you have to pay. The shorter loan tenure that gold loans offer can be stressful, especially if you get a loan with a high interest rate. But for borrowers confident that they can pay off their loan in a short amount of time, the short tenure of a gold loan can prove the more cost-effective option in the long run.

Repayment Options

A personal loan and a gold loan will allow the borrower to repay their loan with EMI (Equated Monthly Installments) to avoid most repayment constraints. That’s a fixed monthly income repayment tenure that the borrower and lender agreed upon ahead of time; however, gold loans have more flexible repayment options. They accommodate customers better because the secured loans assure on-time repayment.

For example, some gold loans have an interest-only repayment option that lets them pay interest until the maturity date, where they will start to pay the principal amount. Another repayment option is to pay off the interest upfront leaving borrowers to only pay the principal component at the end of the loan term.

For the best chance of paying off your loan, gold loans offer options to increase your repayment capacity.

Processing Time

Loan applicants will sign up for a gold loan or personal loan during financial troubles because lenders can process them in the shortest amount of time. However, they must submit the necessary documentation (such as income proof, proof of residence, etc.) with the loan application. While that is a lengthy process by itself, gold loans handle the disbursal of funds more effectively than personal loans.

When applying for the average personal loan, the lender will examine your credit score with a fine-toothed comb to ensure that you’re capable of repaying the loan and of determining your personal loan ranges. There are extra steps involved in getting a business loan where the loan-to-value ratio will determine if your company is worth the financial risk. Since personal loans have a more comprehensive approval process, it usually takes around 2 - 7 days for your money to disburse. Few lenders (save for illegal barred lenders) will approve a loan if the borrower’s credit profile is poor.

Unlike a personal loan, when applying for a gold loan, the lender will check the authenticity of your pledged gold and figure out your loan amount eligibility from that without your credit score coming into the process at all. So if you’re in severe financial trouble, have gold lying around, and poor credit history, a gold loan would be your best bet in getting a larger loan amount in the shortest time possible.

Processing Fee

While lenders will typically disburse gold loans to borrowers as fast as possible, this comes with several processing fees that you have to pay before you get your money. While a personal loan has these fees, they are usually limited to a service fee, insurance, and processing charge.

With gold loans, on the other hand, you’ll have to pay the typical processing fee plus additional ones such as gold valuation fees (a charged based on current gold value), administrative costs, documentation fees, and more. Factoring in those extra costs will allow you to determine the actual cost of applying for a gold loan or personal loan more accurately and choose the one better for your financial situation.

Conclusion

In a gold loan vs. personal loan comparison, neither really comes out ahead. If you don’t mind a slight delay in loan disbursement and prefer a long repayment period with a longer interest rate, get a personal loan. On the other hand, if you have gold assets to put up for collateral and need a loan that day, even if you get a short repayment period, apply for a gold loan.

However, the best thing about these loans is that a poor credit profile is not an insurmountable strike against the borrower’s account.

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