Gold versus personal loan: Which one to choose?

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Taking debt is never recommended. However, when in need of lumpsum money, you may have to go for it. If you are dealing with a short-term financial crunch, you have the option to either go for personal loan or gold loan. Gold loan is secured because you have to pledge some gold with the bank to take a loan against it. Personal loan is unsecured because you don’t produce any collateral in this option.

Gold loan

The interest rates on secured loan are lower because in case of a default, the bank will have physical gold to recover the amount. You may get gold loan at as low as 7% interest rate. Punjab & Sind Bank, Bank of Maharashtra and Indian Bank are offering gold loans at 7%, 7.1% and 7.5%, respectively.

If you take a gold loan of Rs 5 lakh for three-year tenure, the equated monthly instalment (EMI) will come out at Rs 15,439, Rs 15,461 and Rs 15,553, respectively for Punjab & Sind Bank, Bank of Maharashtra and Indian Bank.

We have compiled a table of nine banks offering lowest rates on gold loans:

Among key things, you must know about loan-to-value ratio in gold loans. The loan amount against gold is never 100%. For example, if your gold jewellery is worth Rs 8 lakh, then the bank will approve a loan of 5-6 lakh. The loan-to-value in gold loans is usually up to 75%. The Reserve Bank of India had increased it to 90% for a short period after the first wave of Covid-19.

The loan to value is kept lower to leave some margin against fall in gold prices. In case of a steep fall, you will have to produce more gold to make up for the dip in gold value.

Personal loan

Personal loan is easier to get but comes at higher interest rate. In the current interest rate regime, the starting point at the lower end is 8.90%. Union Bank (8.90%), Central Bank (8.90%) and Punjab National Bank (8.95%) are among top three banks offering lowest interest rates on personal loan. We have compiled a list of nine banks offering lowest rates on personal loans:

You need a good credit score to fetch competitive interest rates on personal loan. What works in its favour is minimal documentation and lower turn-around-time. Personal loan is usually disbursed within 24 hours. On the other hand, gold loan takes time as it involves the bank officials valuing the collateral before disbursing the loan.