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Why gold loan is better than personal loan

It makes sense to utilize the power of the gold lying in lockers to avail loans instead of paying higher interest rates for pure personal loans.

Gold has a certain element of emotional value for all Indians. Taking personal loans against family gold had not been considered a preferable option till late, though the tradition of loan against gold had been in practice for centuries through unorganized money lenders.

The value of gold has been on the rise for the last one century uninterrupted and is currently touching unprecedented heights. Thus, it makes sense to utilize the power of the gold lying in lockers to avail loans instead of paying higher interest rates for pure personal loans. With banks and other financial institutions entering this space of late, there has been a marked increase in personal loans against gold among the Indian middle class.

What is personal loan against gold?
This is a simple modification of the age-old practice by money lenders and has been institutionalized by the banks now. In this loan one has to deposit the household gold in the form of jewellery with the bank or financing agency and get a loan of up to 80 per cent of the value of the gold deposited. The process also requires proper documentation such as submission of identity proof, PAN card, address proof, etc. The interest rate in this case is much lower than a pure personal loan as there is a security being provided by the borrower. The processing time for personal loans against gold is quite less as compared to other loans.

How is it different from a conventional personal loan?

  • This kind of a loan is basically a secured loan as the gold is deposited with the bank.
  • The repayment tenures of such loans are typically shorter, extending to a maximum of 12 months in most cases.
  • The amount of the loan in such a case depends on the value of the gold being deposited rather than the repaying capacity of the individual, which plays a lesser role here.
  • The interest rate of a personal loan against gold is lower than that of a pure personal loan and ranges around 11-15 per cent.
  • There is some amount of risk which the financer takes depending on the movement of gold value in the interim period.

Key benefits of personal loans against gold:

  • The processing time is less and the requirement of documentation is also reduced.
  • Timely payment is ensured as most Indians relate emotionally to gold and would not like to lose their family jewellery through defaults.
  • The interest rates are favorable in case of personal loans against gold.
  • There are provisions wherein only the interest is required to be paid during the tenure and the principal can be paid back at the end of the loan period. This substantially reduces the burden on the borrower.
  • Taking a personal loan against gold lying idle in lockers is being considered by many people as a preferable option over other forms of loans available in the market.

BankBazaar.com is an online loan marketplace.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

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