When you need access to quick funds, such as in emergencies, some convenient ways to access funds can be a personal or a gold loan. Both of these options have their unique structure and benefits and come with certain considerations. Based on your need and ability to repay the loan, you can choose either of these loans to fulfil your emergency financial needs.
Personal loans are unsecured in nature, which means you don’t need to provide any collateral to the lender to secure these loans. They are easy to apply for and offer flexible use of funds. On the other hand, gold loans require you to pledge your gold as collateral.
However, the differences between these loans go beyond just collateral and usage. One must consider many factors such as interest rates, loan tenure, prepayment terms and risks.
To understand these aspects, let’s see how the two loans compare.
Personal Loan Vs Gold Loan: Key Factors To Evaluate
Personal loans
While personal loans don’t require collateral, they typically come with higher interest rates. Most banks and non-banking financial companies offer personal loans for a maximum of five years.
With little paperwork, financial institutions are offering personal loans up to Rs 50 lakh. However, individuals should take note that interest rates on these loans start at around 10% per annum, which can be a significant financial burden. Moreover, the eligibility to secure the maximum personal loan depends on factors like past loan history, credit score, income and relationship with the bank.
To secure these loans, you may need to have a credit score of at least 750 points. Additionally, lenders typically assess your loan repayment capacity in advance. For instance, they may give you a loan based on your monthly salary to mitigate potential repayment risks. Hence, it could be difficult to secure a high-value loan.
Gold loans
In case of gold loans, one needs to pledge their gold as collateral. Because of this, these loans come with lower interest rates and faster approval. But if you fail to repay, you risk losing your gold.
Compared to personal loans, gold loans have lower interest rates, starting at around 8.75%. The loan tenure typically starts with a three-month period.
Gold interest rates are impacted by several factors, including gold prices. If the prices increase, lenders may offer lower interest rates on loans against gold ornaments. This is because increased prices lower the risks. Hence, lenders have the easier option to recover the outstanding loan amount in case of a default on repayment.
As gold prices have witnessed a sharp increase in recent times, this can be a good option to secure emergency funds at lower interest rates. However, it is important to plan your loan repayment strategy to avoid losing your precious yellow metal.
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