Difference Between Gold Loans and Personal Loans: Which is Better?

When faced with financial needs, many of us turn to loans as a solution. Though personal loans generally are a preferred option, higher interest rates and strict eligibility criteria often become a hindrance, especially when you’re in need of urgent cash. Probably that’s the reason why a lot of consumers are opting for Gold Loans. 

In this article, we have dug deep into the realms of both types of loans so that you can make an informed decision. Read this article to know which type of loan could be more suitable for you.

What is a Personal Loan?

Personal loans are unsecured loans, meaning you don’t have to pledge a collateral to secure a loan. Banks assess your creditworthiness, income, credit history and repayment capacity, among other factors to check your eligibility. The interest rates of personal loans are generally higher compared to secured loans like home loans and gold loans. Since you don’t have to hand over any collateral, the risk in terms of loan recovery is higher, hence you’re charged hefty interest rates. However, unlike home loans, where you can use the funds only for property purchase, you can use a personal loan to meet any financial needs.

Key Points:

• Personal loans provide flexibility in terms of loan amount, tenure, and repayment options.
• Interest rates on personal loans are generally higher compared to secured loans like gold loans.
• The loan tenure for personal loans can range from 6 months to 5 years.
• Repayment of personal loans is usually done through Equated Monthly Installments (EMIs) that include both principal and interest components.
• As personal loans are unsecured, the lender does not have any collateral to fall back on in case of default. Thus, they rely heavily on the borrower's creditworthiness.
• You can get loans up to ₹10 lakh.

What is a Gold Loan?

Gold loans are secured loans that use gold as collateral. You pledge gold assets (jewellery or coins) with the lender in exchange for funds. The loan amount sanctioned is usually a percentage of the value of the gold pledged. The percentage could range from 73% to 80% of the market value of the gold. Banks don’t check your credit history or ask for income proof to determine your loan eligibility – everything is based on the value of the pledged gold. Unlike other secured loans, where loans are provided to meet a specific requirement, there are no end-restrictions for gold loans.

Key Points:

• Gold loans offer quick access to funds without lengthy paperwork or credit checks.
• Interest rates on gold loans are generally lower compared to other types of secured or unsecured loans.
• The loan tenure for gold loans is typically shorter, ranging from 6 months to 3 years.
• The repayment of a gold loan can be done through monthly installments or as a lump sum at the end of the tenure.
• In case of default on repayment, the lender has the right to sell the pledged gold to recover the funds.
• You can get loans up to ₹25 lakh

Gold Loan vs Personal Loan: A Quick Loan Comparison

It is always a good idea to do a loan comparison between gold loans vs personal loans before you choose the right option. Here is a concise table with a clear loan comparison.

Gold Loan vs Personal Loan: Which One to Choose?

After a quick comparison, let us tell you when you should choose a gold loan and when to choose a personal loan. 

Scenarios for Choosing Gold Loans:

• Although both gold loans and personal loans serve different purposes, there are specific scenarios where a gold loan might be more suitable:
• Urgent financial needs: Gold loans offer quick access to funds, making them suitable for emergencies or immediate expenses.
• Low or no credit score: Individuals with a poor credit history can still obtain a gold loan as it is primarily secured by the collateral.
• Short-term requirements: If you require funds for a short period, such as for a wedding or to bridge a financial gap, a gold loan can be an ideal choice.
• Higher loan amount: In case you need a higher loan amount with minimum hassle, opt for a gold loan.

Scenarios for Choosing Personal Loans:

• While gold loans have their advantages, personal loans may be more suitable for the following scenarios:
• No collateral available: If you do not have any gold assets to pledge, a personal loan allows you to borrow funds without providing any collateral.
• Long repayment tenure: Personal loans offer longer repayment periods, allowing borrowers to manage their finances better with affordable EMIs.
• Short-term requirements: Let’s say you need ₹25,000 cash urgently and you’re sure that you can repay the loan in two instalments, you can opt for a personal loan.