Gold Loan Vs. Personal Loan: Which Is Better? | Personal financial news
Everyone needs financial assistance from time to time, and there is no shame in looking for loan options in order to obtain them. However, there are many loan options and you may have difficulty deciding between them.
Borrowers typically use gold and personal loans for emergency cash infusions because of their fast loan disbursement and lack of restrictions on end-use loan proceeds. While the gold and personal loan applications are checked for bad creditworthiness, the creditworthiness plays less of a role here than with high-profile loans.
Below we’ve provided a comprehensive personal loan versus gold loan comparison so you can make an informed decision about what is better in an emergency.
Definition of a gold loan and a personal loan
Gold Loan – You will get a better idea of what a gold loan is if it is referred to by its other name: “Loan for Gold”. Essentially, the borrower invests their gold assets and receives a percentage of the value of that piece as a loan amount, creating what is known as a secured loan. From there, the borrower pays monthly installments until he has paid off the loan, after which the lender returns the deposited gold.
Private loan – A personal loan (like a signature loan) works similarly to a gold loan, except that it is an unsecured loan, which means it does not require any collateral. Without a repayment guarantee, the loan amount will usually be much smaller and it will be more difficult for the loan applicant to obtain a loan approval.
During the application process for both loans, the loan intermediary reviews the applicant’s credit profile, but it usually doesn’t play that big a role in gold loan approval.
Gold loan vs. personal loan
Lenders charge higher interest rates based on the payout on a loan. For example, gold loans tend to have higher payouts than personal loans or other unsecured loans, so their interest component has skyrocketed.
On average, the interest amount on a gold loan can vary between 7.5% and 29%. In contrast, personal loans range between 9% and 24%. When it comes to paying interest on a loan, however, the risk assessment plays a major role. Gold loans have lower interest rates because it is a secured loan; the borrower provides collateral to reduce his risk of default. At the same time, because of their unsecured nature, personal loans will ultimately have higher interest costs
The loan term is the amount of time the lender allows the borrower to repay the loan. Personal loans typically have terms of one to five years, while gold loans offer much shorter repayment periods of three years to seven days, depending on the loan size.
While higher repayment terms give you more leeway to pay off your debts, they also leave time to accrue interest, which increases the total amount you have to pay. The shorter repayment terms that gold loans offer can be stressful, especially when you are getting a loan with a high interest rate. But for borrowers who believe they can pay off their loan in a short amount of time, the short term of a gold loan can prove to be the more cost-effective option in the long run.
A personal loan and a gold loan allow the borrower to repay their loan using EMI (Equated Monthly Installments) to avoid most repayment restrictions. This is a fixed monthly repayment period that the borrower and the lender have agreed on in advance; However, gold loans have more flexible repayment options. They are better suited to customers because the secured loans guarantee on-time repayment.
For example, some gold loans have an interest repayment option that allows them to pay interest until the due date where they begin paying the principal. Another way of repayment is to pay off the interest in advance so that the borrower only has to pay the main 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 ability.
Loan applicants will get a gold loan or personal loan in financial trouble because lenders can process them in no time. However, you must submit the required documents (such as proof of income, proof of residence, etc.) with the loan application. Although this is a lengthy process, gold loans handle withdrawals of funds more effectively than personal loans.
When applying for the average personal loan, the lender will fine-tune your creditworthiness to ensure that you are able to repay the loan and set your personal credit lines. Additional steps are required to obtain a business loan, where the loan-to-value ratio determines whether your business is worth the financial risk. Because personal loans have a more comprehensive approval process, it usually takes around 2-7 days for your money to be paid out. Few lenders (other than illegally blocked lenders) will approve a loan if the borrower’s credit profile is poor.
In contrast to a personal loan, when applying for a gold loan, the lender checks the authenticity of your pledged gold and uses this to determine your loan amount without your creditworthiness being included in the process. So, if you are in serious financial trouble, gold lying around and bad credit history, a gold loan is your best bet to get a larger loan amount in no time.
While lenders usually pay off gold loans to borrowers as quickly as possible, it comes with several processing fees that you must pay before receiving your funds. While these fees apply to a personal loan, they are usually limited to a service fee, insurance, and a processing fee.
For gold loans, however, you will have to pay the usual processing fee plus additional fees such as gold valuation fees (which are calculated on the current gold value), administration costs, documentation fees and more. When you factor in these additional costs, you can be more specific about the real cost of applying for a gold loan or personal loan and choosing the one that is better suited to your financial situation.
In a gold loan vs. personal loan comparison, both do not really cut off. If you don’t mind a slight delay in loan payments and you prefer a long term with a longer interest rate, get a personal loan. On the other hand, if you need to put gold values on deposit as collateral and need a loan that day, even if you have a short repayment period, apply for a gold loan.
The best thing about these loans, however, is that a bad credit profile is not an insurmountable blow to the borrower’s account.
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