Sentiment-driven Indian households find themselves inevitably attached to the gold they own, emotionally. The deep sense of personal belonging that Indians associate with the precious metal gets them to hoard jewellery, coins or bars, made out of it. Pleading family-owned gold assets to pawnbrokers and formal money lending institutes is looked upon with contempt even in most rudimentary areas of the country. Indian families thus rarely liquidate the gold assets they own even in cases of dire financial emergencies. Thus, the monetary value of the gold investment in India is seldom realized.
In the advent of formalization of the lending sector, organized institutions like banks and NBFCs have focused on improving the way credit sector functions. At the same time, the Indian population is starting to realize the immense potential that they can recognize by availing gold loans. This has led to the sudden popularity of gold loans over personal loans.
Numerous experts sing the benefits of a gold loan over personal loans. Personal loans and gold loans are both sanctioned to borrowers who seek to meet any kind of individual need like marriage expenses or purchases etc.
Here are some of the differences between gold loans and personal loans:
Borrowers do not need to present any collateral in case of personal loans; however, a gold loan is sanctioned, keeping gold assets as collaterals.
In the case of personal loans, banks are not offered any collateral. The lending institutions then scrutinize the loan applicant's income proof documents. Thus, they end up charging nominal processing fees for personal loans. Generally, the processing fees for personal loans ranges from 0.5% to 1% of the loan amount.
When applying for a gold loan, borrowers do not need to present income proof documents because they offer their gold assets as collaterals. This omits out the expense of processing fees.
Most financial institutions scrutinize the income of proof documents in the absence of collaterals when they receive applications for a personal loan. They also conduct thorough due diligence to ascertain that an applicant has adequate repaying capacity. This can be a time-consuming process and can delay the loan sanction.
For gold loans, the process remains simple. Borrowers submit their gold assets as collateral and sign some documents. The loan amount is granted immediately afterwards.
While lending institutions can offer personal loans for up to Rs.40 lakh to borrowers, applicants for gold loans can leverage a comparatively higher maximum cap on the loan amount. Most banks and NBFCs sanction gold loans for a maximum amount of INR 5 crore. Thus, borrowers looking to borrow higher sums of money should opt for the gold loan route.
Applications for personal loans are assessed based on an applicant's credit scores, which shows how their repayment behaviour is in general. In the absence of collaterals, personal loan officers assess credit score to ensure that once sanctioned; the personal loan will be repaid in time.
Borrowing through gold loans, individuals' credit score doesn't matter. Lending institutions keep gold assets as collaterals and do not necessarily run creditworthiness assessments on applicant's profiles. Even if an applicant fails to furnish instalments for their existing loans or repay a debt obligation, they can avail a gold loan.
A generic comparison between gold loans and personal loans shows that gold loans come with lower interest obligations. A gold loan is sanctioned at interest rates that range between 11-13%, but a personal loan is a sanction on interest rates that range between 16-22%. For a borrower, this means that the cost of raising a gold loan is less than that of raising a personal loan. This makes repaying the gold loans a tad bit easier than repaying personal loans, even if they are built for the same amount of money.
For gold loans, borrowers can choose from various repayment options. For example, borrowers can simply select the regular EMI option to repay a gold loan. They can also opt to repay the interest during the loan tenure and pay the loan amount at the end of the mandate. Sometimes, borrowers choose to pay the interest and loan amount at the end of the tenure in a lump-sum fashion.
For most Indian households, gold remains the most preferred avenue of investment. Further, the constant rise and fall in gold prices present vivid opportunities for investors to procure the shining metal. In the long run, gold offers a lucrative opportunity of availing a loan. It is fair to conclude that availing loans against gold assets is a more profitable option than availing personal loans.
Firstly, lending firms are far more comfortable in lending against security as compared to loan applications that come sans one. Gold, as we know, is a quality security option and hence guarantees faster loan disbursement. Lending institutions can auction the gold security of the loan applicants in case of non-payment to fetch their dues. That is why it becomes easier for borrowers to raise money from gold loans instead of personal loans. Further, an applicant for a gold loan doesn't need to bring in a guarantor for availing it.
Like personal loans, gold loans also cater to a variety of needs. Funds raised through gold loans can be efficiently utilized to pay off some high-cost liabilities such as credit card outstanding that bother regular borrowers. Be it raising money for medical emergencies or paying for a child's education; gold loans can be resourceful instruments in helping individuals facing a credit crunch. Even business entities can raise gold loans and sign up for an overdraft facility against their gold assets to serve their working capital requirements.
Shriram City Union Finance Gold Loans allow individuals to raise loans against gold jewellery, in the absence of access to formal credit within a reasonable time.