When you need quick funds, both personal loans and gold loans are popular options. They offer flexible usage and are disbursed quickly—especially useful in emergencies like urgent home repairs or critical medical treatments. But which one suits you better? While personal loans are unsecured and require strong creditworthiness, gold loans require gold as collateral. Beyond this, several other factors differentiate them. Let’s break them down to help you decide.
Interest Rates
Interest rates significantly impact the cost of borrowing. Gold loans typically have lower rates ranging from 7 per cent to 15 per cent, while personal loans range from 10 per cent to 24 per cent, depending on the borrower’s risk profile and lender’s policies. Gold loan rates can also vary based on the loan tenure, amount, and repayment terms. Compare lenders to find the best deal.
Collateral Requirement
Gold loans are secured loans and require physical gold to be pledged as collateral. If you fail to repay your loan, the lender can auction your gold to recover their dues. In contrast, personal loans are unsecured loans and don’t require any collateral, but missed payments can damage your credit score, making future borrowing difficult. If you have a good credit score and prefer not to pledge assets, a personal loan may be a better choice.
Eligibility Criteria
Being unsecured, personal loans have strict eligibility evaluations that help lenders minimise their risk. A high credit score of 750 or above, verified employment, and a stable income are factors lenders favour to approve loans. Gold loans, on the other hand, are secured loans backed by gold as collateral and, hence, have relaxed eligibility criteria. In case of loan defaults, lenders can sell the pledged gold ornaments to recover their costs. So, borrowers struggling to get a loan with poor credit scores can consider gold loans if they have the assets to pledge.
Loan Amount
Personal loans are typically given for amounts ranging between Rs.50,000 and Rs.15 lakh, with some lenders offering even higher. The final amount offered may eventually depend on the applicant’s repayment capacity and loan tenure. In the case of gold loans, the loan amount mainly depends on the valuation of the gold offered as collateral and the lender’s loan-to-value (LTV) ratio, which cannot exceed 75 per cent as per the RBI-imposed regulatory limit.
Loan Tenure
Gold loans typically have shorter tenures of 12 months to 3 years, making them ideal for short-term financial needs, while personal loans offer longer tenures of up to 7–8 years, suited for long-term goals. Shorter tenures mean lower overall interest costs but higher EMIs, making gold loans suitable for those with strong repayment capacity. In contrast, personal loans are better suited for borrowers who need larger amounts and lower EMIs stretched over an extended period.
Repayment Flexibility
Gold loans offer multiple repayment options in addition to monthly EMIs. Borrowers can choose to pay only the monthly interest and settle the principal at maturity, pay the interest upfront and repay the principal at maturity, or even repay the principal and interest in a lump sum at maturity. These options make gold loans suitable for borrowers wanting greater flexibility in repayments. Personal loans, on the other hand, typically require fixed EMI repayments that cover the interest and principal. Some lenders also offer overdraft facilities, allowing borrowers to withdraw funds as needed and pay interest only on the used amount.
Also Read: Gold Rate Today (March 6): Check Out Gold Prices In Delhi, Mumbai, Bengaluru, Ahmedabad, More Cities
Processing Time
With minimal documentation and no credit checks, gold loans are often disbursed within a few hours. In contrast, personal loans can take up to seven days, as lenders conduct credit checks and assess income and repayment capacity. If time is crucial, a gold loan can be faster, hence a better choice.
Loan Fees
Loan-related costs can make borrowing costlier or cheaper. Gold loans tend to have lower processing fees (0.5 per cent to 2 per cent of the loan amount) whereas personal loans often have higher fees (typically between 1 per cent and 3 per cent). If you’re looking to keep borrowing costs low, a gold loan may be the more budget-friendly choice.
Which Should You Choose?
Your choice depends on your financial situation and urgency. If you have a low credit score but own gold, a gold loan offers quick and affordable funds, making it ideal for short-term needs like medical emergencies or business cash flow. A personal loan, however, is better for long-term expenses like home renovations or education, though it comes with higher interest rates and stricter approval criteria. Evaluate your needs, eligibility, and repayment ability before deciding.
(The author is the Senior Manager - Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)