Learn all about the low interest rates on asset-backed loans such as gold loans or loans against property. This article will help you make the right choice.
When faced with a financial dilemma, the first thing that comes to mind is opting for a loan. While Personal Loans are tailor-made for short term financial needs or a sudden financial crunch, the high interest rates makes them quite stressful on the pocket.
Sometimes, the financial need may be much beyond what a Personal Loan can offer. Opting for either a gold loan or a loan against property can be useful remedies in such situations. Here is a comparison between gold loans and loans against property to understand which can work better for you when faced with a financial crunch.
Additional Reading: Should You Go For Loan Against Property To Fund Your Wedding?
Indians have a unique fascination with gold. Every family, irrespective of their financial situation, has some quantum of gold or gold jewellery in its possession. Gold loans offer immediate liquidity by mortgaging the gold or jewellery without having to sell the jewellery in a financial emergency.
Advantages And Disadvantages
Gold loans once started off as a popular loan option, have lost their sheen somewhat over the years.
Easy to avail: Gold loans are easy to avail, making them ideal for a financial emergency. Currently, most non-banking financial companies (NFBC) offer loan against gold. The overall loan processing time for a gold loan is quite less and you can get a gold loan approved in less than a couple of hours, making it an almost instant loan.
Availability of flexible schemes: Unlike other loans, gold loans offer various flexible schemes. For example, you can choose to pay only the interest component during your loan tenure and pay the borrowed amount at the end of the tenure, making the loan far more useful and pocket friendly.
Limited repayment woes: In the worst case scenario, if you are not able to repay your gold loan, the bank will take possession of the pledged gold or jewellery to recover its dues. There is no unwanted recovery problem as in case of unsecured loans like Personal Loans or loan against property which is recovered through the sale of the property.
High interest rates: Initially, gold loans were cheaper when compared to other loans like Personal Loans. While Personal Loans come with an interest rate of 15-26% per annum, gold loans were being offered at 12-16% rate of interest per annum. With falling gold prices and RBI seeking NBFCs to maintain a minimum LTV (Loan-To-Value) for the loan, interest rates have increased and are now more or less at par with Personal Loans thereby offsetting the interest rate advantage.
Low LTV and short tenure: The Reserve Bank of India has barred NBFCs from offering loans with a Loan-To-Value ratio exceeding 75%. So, if you are mortgaging a gold jewellery worth Rs. 1 Lakh, you can at best get a loan of only up to Rs. 75,000. Add to it the loan processing fee and other charges thereby reducing the final amount you can get in hand. Gold loans have a maximum tenure of 1 year. So you should be taking a gold loan only if you are sure that you can repay the amount in the short tenure.
Loan against Property
If you have a property, you can consider opting for a loan against your property to fund you for any financial needs. The loan value is calculated as per the market value of the property and your repayment capacity.
Additional Reading: Is Taking A Loan Against Your Property A Good Idea?
Advantages And Disadvantages
Low interest rates: Since LAP is a secured loan, the interest rates are lower and range between 12-16% on an average compared to 16-22% for a Personal Loan or gold loan.
Can opt for either banks or NBFCs: Both banks and NBFCs offer LAP, so you can choose the most suitable lender as per your preference.
Cumbersome loan procedure: When opting for a loan against property or LAP, the bank or NBFC will take time in evaluating the market value of your property, reviewing the legal documents and doing other background checks like your repayment capacity. All this takes time and hence you cannot get an instant loan when faced with an emergency situation.
Strict terms and conditions with default leading to a financial stress: Unlike Home Loans, you do not get any tax advantage when paying EMIs for your LAP. Once you take a LAP, you have to abide by the strict terms and conditions. Late payment of EMIs can result in penalty as per the terms and conditions of the bank concerned.
Tough non-repayment woes: In the worst case scenario, if you are unable to repay the loan, the bank has its right to take possession of your property and auction it to recover its dues which can be quite stressful for the borrower.
The Bottom Line
If you need quick money for short tenure, gold loans can be beneficial, but if you are looking for a higher quantum of loan with low interest rate, loan against property can be your preferred loan option.
Don’t know which loan is best suited for you? Fret not, you can compare various loans and figure out the best option from our website.