The financial market comprises a legion of potential debt-based instruments, such as loans, which have succoured the diversified needs of individuals and businesses by now. Different types of loans ranging from home loans to auto loans, mortgages to payday loans, student loans to small business loans and gold loans to personal loans; the options are manifold as all are designed to suit both the long-term and short-term financial needs.
Considering the short and medium-term financial needs, gold loan and personal loan are two of the most propitious options being sought after by credit seekers. However, each one of the options certainly has its own set of downsides as well which, often becomes the deal-breaker for loan seekers. Here we bring you an in-depth exploration of both the pros and cons of these two options.
Gold loan is a secured loan where the loan applicant needs to pledge a definite amount of physical jewellery or gold as in the form of collateral in exchange for credit. This type of loan is considered as the most ideal option for attaining funds, especially during an emergency as it can be procured within a short-term duration.
- No relevancy of credit score: Unlike personal loan, in case of a gold loan, the lender does not need to be much concerned about the credit score. It is because of the fact that the amount of gold being pledged serves as the collateral against the risk and contingencies involved with non-repayment of loan amount.
- Lower interest rates: Another significant advantage of gold loan over personal loan is the rate of interest. The gold loan charge a reasonably lower rate of interest compared to a personal loan. This results in a lower outgo from your pocket in the form of interest.
- Minimal documentation: Both money lenders and banks who equip customers with gold loan generally do not require any sort of extensive documentation for sanctioning the loans. Since no sort of financial security is being pledged by the borrower, the entire process of paperwork also becomes quite hassle-free and swift.
- Easy and fast loan processing: While comparing in between gold loan and personal loan, the former showcases a faster and swifter loan processing process. Since it features processing of lesser documentation, the gold loan can be disbursed within few hours of approval.
- No charges for prepayment: Unlike personal loan, gold loan generally does not have a fee on prepayment of the loan.
- Repayment flexibility: In case of gold loan, the borrowers are being equipped with the option of choosing from an array of repayment modes on the basis of their budgetary convenience. Some of the potential options available to them are:
- Paying the principal amount towards end of the loan term.
- Paying off the loan through EMI schemes.
- Paying the interest during loan tenure.
- Paying off the loan amount (principal + interest) at end of the loan tenure, without paying anything on beforehand.
- Shorter loan tenure: Gold loans usually come with a shorter tenure compared to an average term of around 1-7 years in case of personal loans. Considering the average basis, gold loan borrowers are generally provided with a loan tenure of around 3 months to 3 years.
- Low quantum of loan: In terms of gold loan, the money lenders and banks usually offer around 75-80% of the total gold value being pledged. Thus, the remaining proportion of gold value remains unutilized for borrowers, thereby driving them away from deploying the full value of pledged gold.
- Chances of loss: Unlike personal loan, the gold loan borrowers need to pledge their accumulated gold as a collateral for loan sanctioning. Thus, they generally need to bear the risk of losing their gold in case they fail to repay the loan amount.
Considering the second option, personal loan is an unsecured loan, provided to meet varied short and medium-term financial obligations. This loan is mostly provided without any sort of security or collateral and thus, impose a higher rate of interest. The primary factor that influences a personal loan approval is the borrower's credit score by which, the lenders get a clear glimpse of his repayment history and capacity.
- No collateral required: One of the crucial and decisive attributes of a personal loan is; the borrower does not need to pledge any sort of collateral security to the lender for obtaining the loan. Thus, the borrower is not being compelled to deploy any of his assets such as real estate, gold or life insurance in the form of security while applying for the loan.
- Quick loan disbursal: Once the loan gets approved, it does not take much time for the amount to get credit to the borrower's bank account. Majority of the banks and lenders used to credit the loan amount to the borrowers' chosen bank account within a time frame of around 48 hours after approval.
- Minimal paperwork: The process of applying for a personal loan does not require the borrower to provide heaps of documents. The lender or bank representative will ask for just a few basic KYC documents, along with the proof of income.
- No restriction on end usage: Another significant point of advantage is versatility, which emphasizes on the fact that; while considering the end use of the loan, no restriction on the aim for which the funds can be utilized (considering it is not illegal). Thus, it can be used for meeting a myriad of financial needs such as paying off debts, house renovation, wedding planning and more.
- Higher Interest rates: Being one of the major drawbacks, the interest rates of personal loan is comparatively higher compared to other forms of loans. This, in turn, means that; a specific interest amount is being added to the payable principal loan amount for obtaining this credit. Moreover, personal loans are inclusive of a loan processing fee, which is calculated as a specific percentage of the loan amount being sanctioned.
- Relevancy of credit score: One of the most decisive factors that influence the borrower's eligibility is his credit score. Since there is no requirement of a collateral security, credit score of the borrower acts as the guarantee of loan repayment. Unfortunately, a low credit score signifies higher chances of non-payment and hence, will result in non-acceptance of the loan application.
- Charges for prepayment: Majority of banks and lenders impose a penalty on the borrower for prepaying a personal loan. Thus, even if his propensity to cash increases and he decides to pay off the loan on earlier basis, he will be entitled to paying a penalty for doing so.
After taking a deep dive into the pros and cons of both the options, it can be summed up that both gold loan and personal loan have their individual set of trump cards as well as stumbling blocks. Adhering the same, any single option will not be able to serve as the one-size-fits-all solution for all. Thus, it is of paramount significance for a loan borrower to evaluate the attributes of both of these financial instruments meticulously before drawing the conclusion.