Six things to consider before opting for a personal or gold loan

In this piece, we compare the features of personal loan and gold loan available for customers.

Loan Amount

The personal loan amount usually ranges from ₹50,000- ₹15 lakh, with some lenders claiming to disburse higher amount of ₹30 lakh to ₹40 lakh. The loan amount eligibility set by lenders is primarily based on the applicant’s repayment capacity and the loan tenure.

In the case of gold loan, the loan amount primarily depends on the valuation of gold deposited as collateral and the lender’s loan-to-value (LTV) ratio. The LTV ratio of gold loan can vary widely depending on the lender, repayment option opted for, applicable regulatory cap, etc. The RBI has imposed a regulatory cap of 75{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} on the gold loan LTV ratio.

Interest rates

Gaurav Aggarwal, Director, Paisabazaar.com, said, “Personal loan interest rate usually ranges from 10{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}- 24{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} p.a., depending on the lender and applicant’s credit profile. Gold loan interest rate can widely range between 7.00{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}- 29{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} p.a. depending on the risk assessment of the loan applicant by the lender, loan tenure, loan amount, and repayment option opted for.”

Some lenders also tend to charge a higher interest rate for the higher loan amount. While the difference in the interest rate of both these loans may not be much for those with a good credit profile, the interest rate of a gold loan usually tend to be lower than a personal loan for those with a poor credit profile.

Repayment tenure

The tenure of a personal loan generally ranges from 1 to 5 years, with some lenders offering maximum tenure of up to 7 years. The repayment tenure of the gold loan is generally on the shorter side, with maximum tenure going up to just 3 years for most lenders. However, some gold loan lenders offer a slightly higher tenure of around 4-5 years.

Disbursal time

While submitting personal loan applications, borrowers are required to deposit their ITR forms/payslips and other documents for getting their application processed. As the verification of these documents tends to take some time, disbursal of personal loans may take up to 2-7 days. However, some lenders claim to offer quicker disbursal of personal loan, especially in the case of the pre-approved ones.

The gold loan has one of the quickest disbursals among all loan options usually disbursed within a few hours of submitting the loan application. The evaluation process is primarily based on the quality of the collateral with almost little or no emphasis on the evaluation of the borrower’s credit profile.

Processing fees

Aggarwal said, “The processing fee of personal loans usually ranges around 1{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb}-3{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} the loan amount. In the case of gold loans, these charges usually tend to go up to 2{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} of the loan amount, with some lenders charging flat fees starting from as low as ₹10 onwards. Hence, loan applicants should factor in the processing charges while deriving the actual cost of availing a loan.” Aggarwal further said, “Even a minor difference in the rate of processing fee can significantly impact the overall cost of your loan, especially in case of big-ticket loans.”

Poor credit profile

The unsecured nature of personal loans prompts lenders to take a cautious approach. They primarily approve personal loan applications after factoring in an applicant’s credit scores, monthly income, job profile, employer profile, etc. Some lenders have also started setting the interest rate for personal loan applicants based on credit profile.

Gold loans, on the other hand, are fully secured loans backed by adequate collateral. This allows lenders to sell the pledged gold in case of default by the borrower. Hence, lenders tend to take a less stringent lending approach while approving gold loans to those with poor credit scores and credit profiles.