Generally, Financial contingencies are unannounced. The only way to get tide over such contingencies can be by taking loans. Conditions to get loans can be anything like a marriage of a sister, or paying any emergency medical bills. A loan can fulfil an instant need for finance. In the market, there are various types of loans to meet your financial needs. Personal loans and Gold loans are two of them.

In this article, we will discuss how to choose between personal and gold loans. We will compare the aspects of both loans. We will start by defining them both.

What is the Gold Loan?

A gold loan in the form of coins or jewellery as collateral in which you need to pledge your gold assets. Based on the current quality of gold and market value, typically 70% – 80% of the total gold value is offered as a loan. Based on the loan-to-value [LTV] ratio the amount is calculated. Through monthly you can repay your gold loan instalments. The lender will return once the loan has been cleared that was deposited. Many people are not sure whether a gold loan is unsecured or secured in nature. When a gold loan is offered against collateral i.e. which is your gold then it is a secured loan.

There are no benefits of gold loan tax unless you use the funds towards the purchase of a residential property, home improvement, or as an expense of business. You can avail of tax deduction in the case of home improvement, under the Income Tax Act, 1961 Section 80C.

The amount deducted is capped for the principal amount at 1.5 lakhs per year. Under Section 24 of the Income Tax Act 1961, if the loan is used for the construction of or for purchasing a property in a residential area, then the deduction amount will be Rs. 2 lakhs.

Advantages of Gold Loan:

• There is no restriction on the end use of gold loans, unlike other home loans like car loans or home loans.
• At an affordable interest rate, most financial institutions and banks offer gold loans.
• The approval of the gold loan and the process of disbursal is hassle-free and swift.
• To get a gold loan you do not need a good credit history.
• There is a Quick turnaround time.
• It offers a relatively low-interest rate.
• It offers zero repayment charges.

Disadvantages

• If you are unable to repay the loans, the major drawback of a gold loan is that in case of a breach, the right of the lender arises to liquidate and recover the money from the reserved gold.
• The LTV ratio differs from one lender to another when you avail a good loan. The value of pledged gold the maximum amount that you can is only 80% of that value.

The minimum loan that you can get is Rs 4 lakhs, if the market value of the gold is Rs 5 lakhs.

What is a Personal Loan?

Where a Gold loan is a secured loan only personal loans are unsecured. Unsecured loans mean that to get funds they do not have to provide any collateral. You will be eligible for a loan where lenders consider you creditworthy. Based on your credit history, nature of employment, and on your income, repayment capacity you need to prove your eligibility and it depends upon the lender’s policy.

Advantages of Personal loan

• Without a security collateral or deposit can make it less risky, you can get a loan of financing.
• The interest rates are lower than other unsecured loans like credit cards.
• By combining all payments into a monthly single payment, personal loans can be used to improve credit scores and consolidate high interest.

Disadvantages of Personal loan

• It attracts penalties and fees and the cost of borrowing also increases. It depends upon the lender, you have to process the fees ranging from 1% to 6% of the loan amount.
• It depends on the credit score if you want a low interest rate for a personal loan. 
• On a previous lending product, if you have ever missed paying your EMI, it can be an issue to a desired loan amount.

Comparing Gold loans and Personal loans.

Comparing both types of loan on various criteria:

Loan Amount

In a Gold loan, the loan amount is up to Rs. 25 lakhs whereas in a personal loan, the loan amount is Rs. 50,000 to Rs. 20 lakhs.

Interest Rates

The interest rate on the gold loan is 7.7% per annum onwards whereas in the personal loan, the rate is 8.50% – 13.60% per annum.

Processing time

In Gold loans, it can be sanctioned in 19 -120 min but in personal loans, it can take time from 24 hours to 7 working days.

Tenure of loan

The tenure is 12 months to 36 months whereas a personal loan is 48 months to 84 months.

Eligibility

Gold loans:-

1. The individual applying for the loan should be its owner or minted gold coins, especially by banks.

2. The limit of the borrower should be a maximum of 50 gm.

3. The borrower must be a citizen of India.

Personal loan

1. Age must be between 21 and 65 years.
2. Must be a resident of India.
3. Must be an employee of any private or government or any public company.
4. CIBIL score should be a minimum of 701.
5. Documents required are PAN/Passport/Voter’s ID card.
6. Salary slip of 3 months
7. Bank account statement of 3 months.

How to understand which one is better?

This is always a confusing question but as we know Gold loans are secured and attract lower interest rates whereas Personal loans are unsecured and provided at a high rate. The processing fees in Gold loans are less as compared to Personal loans. Both types of loans help in managing urgent and important expenses, it can be planned or any unplanned situation. It’s up to the individual to choose correctly whereas Gold loans are preferred over Personal loans.