Gold Loan vs Personal Loan: Know the Difference

When it comes to various loan options, a borrower can look at a gold loan or a personal loan. However, there are a few key differences between these two modes of loan disbursal. 

Loan approval process: 

In the absence of collateral in personal loans, lenders tend to be a bit cautious when it comes to evaluating personal loan applicants. Generally, some of the factors that are considered to evaluate an applicant’s creditworthiness include credit scores, monthly incomes, occupation profiles, and employer profiles, to list a few. 

As gold loans are fully secured loans supported by adequate collateral, lenders usually adopt a relatively relaxed approach when it comes to evaluating gold loan applicants. 

Difference in interest rates: 

Interest rates of personal loans generally begin at 10.5% per annum, depending on the applicant’s credit profile and the credit pricing policies of the lenders. There are a few public sector banks that could offer personal loans at lower interest rates. 

Similarly, the interest rates of gold loans can vary relatively depending on the loan tenure, loan amount, and chosen repayment option.

Maximum loan amount: 

Personal loan amounts typically range between Rs 50,000 and Rs 15 lakh. However, the maximum loan amount a person can avail of would primarily be related to the applicant’s repayment capacity and the loan tenure opted for.

On the other hand, the amount in the case of a gold loan would primarily depend on the valuation of the gold deposited as collateral and the Loan-To-Value (LTV) ratio set by the lender. However, the gold loan LTV ratio cannot be more than 75% due to the regulatory cap imposed by the Reserve Bank of India (RBI).

Range of loan tenure: 

Personal loan tenures generally range anywhere between one and five years. There is a possibility that a few lenders could offer maximum tenures of up to seven to eight years. 

At the same time, the repayment tenures of gold loans are comparatively shorter, with most lenders offering maximum tenures of up to three years. However, there are a few gold loan lenders that offer a bit longer tenures, which could be up to four to five years.

Due to shorter repayment tenures, interest costs tend to be lower, but Equated Monthly Installments (EMIs) can be higher. So, applicants having adequate repayment capacity to pay off their loans within shorter time horizons should go in for gold loans. 

Meanwhile, applicants requiring longer tenures because of larger loan amounts and/or lower repayment capacity should ideally opt for personal loans.

Turnaround time for loan disbursal: 

Gold loans have one of the quickest turnaround times when it comes to loan disbursals, which could be within a few hours of submitting the loan application. However, in the case of personal loans, most lenders may generally take up to two to seven working days for disbursal. 

At the same time, with banks and Non-Banking Finance Companies (NBFCs) adopting 100% digital loan evaluation and onboarding processes, the processing and disbursal of personal loans, especially those applied via online modes, have become relatively quicker. 

A few lenders also offer pre-approved personal loans, with same-day or instant loan disbursal, to those existing customers who have good credit profiles.

Choices of repayment options: 

Lenders tend to offer a wider choice of repayment options in the case of gold loans. Besides the usual EMI mode, lenders tend to allow the option to service their interest component every month while allowing the principal component to be repaid on the loan maturity date.

Also, a few lenders allow their borrowers to repay the interest component upfront at the time of loan disbursal, giving the option to pay the principal amount at the end of the loan tenure. 

In addition, a few gold loan lenders allow the flexibility of repaying both interest and principal components at the end of the loan tenure. Personal loans are generally repaid in the form of EMIs, including the principal and interest.

However, a few lenders have started providing personal loans in the form of overdraft facilities, wherein a credit limit is sanctioned to the borrowers. 

In this case, borrowers have to service the interest component every month and can repay the principal component as per their convenience related to the fund. At the same time, the borrower can make multiple withdrawals and deposits depending on their cash flows. The interest cost is charged based on the limit utilised and not on the sanctioned limit.