The smart money is on Gold loans, in the Gold Loans vs Loan against property debate

Jul 25, 2020

The smart money is on Gold loans, in the Gold Loans vs Loan against property debate

Loans are one of the most fundamental financial instruments that we use in day-to-day lives. From weddings to medical emergencies, loans provide money when we need it the most. Secured loans, where you pledge your assets as collateral, help you to raise money and recover from severe cash-crunch. However, there is a fair bit of ‘ Gold loan vs loan against property’ comparison that one can do based on the pros and cons of each. Below we constructively breakdown both of these borrowing options for you, in the light of RBI regulations.

What are Gold loans?

To put it simply, you secure your loan by pledging your Gold ornaments as collateral. Unlike, loan against property eligibility, which is quite complex, all you need here is gold jewellery to obtain the loan. Therefore, gold loans allow quick access to a wide-bracket of people to short-term liquidity. An in-house expert, appointed by the lender, examines the gold to ascertain its correct worth, which serves as the basis for deciding the loan amount. These are usually short term loans, where you can receive up to 75% of the gold’s value as a loan.

The interest rates are low and tenure is moderate, which makes the process much less expensive in comparison to other kinds of borrowings. What’s even more surprising is that your credit history is not much of a factor in deciding eligibility, making it possible for you to obtain a loan, even with a low credit score.

What are loans against the property?

Here, you are required to pledge a property you own, either residential or commercial, to get the loan. Generally, these are loans of a relatively long tenor, which can stretch up to 20 years or more in some cases. The loan amount provided to you is typically 70% of the market value of the property. Loan against property interest rate varies, and so does the interest rate on gold loans, depending upon the bank or financial institution you opt for.

The loan against property interest rate calculator provides lower interest rates on average, however, one must keep in mind that these are long-tenured loans that often prove costly. It is because over time the interest accrues, and you end up shelling out a lot more money than you initially thought you would.  Moreover, your credit history is an essential factor in deciding your eligibility, as a low credit score may result in rejection of your application.

Gold loan VS Loans against property

Now that we have learned some fundamentals let us compare and contrast individual aspects of the loans.

  1. Rate of Interest

Without a doubt, it is one of the primary things a prospective borrower considers before applying for a loan. Gold loans, being short to medium term loans that usually last from 6 to 18 months, are charged at fixed interest rates. Depending upon the lender, the interest rates may vary from 10.5% to 26%. In the case of, loan against property, the interests are available at both fixed and varying rates. Particularly for long-tenured loans, varying interest rates can be very risky, as you might have to pay a much higher interest rate than you anticipated. The fixed interest rates of loan against property range from 9.6% to 14.15%.

  1. Collateral

In the case of a gold loan, you are depositing gold ornaments as your collateral to the lender, which is kept safely, and returned to you exactly as it was, on repayment of the loan. Whereas, in the case of loans against property,  you are submitting your property ownership papers to the lender, which the lender will hold on to until you repay the loan in full.

  1. Eligibility Criteria and loan process

Incase of a gold loan, the loan process is pretty simple. All you need to have is gold and KYC documents that prove your identity, and you are eligible to get a loan. However, in the case of loans against property, it is a lot more complicated. There are numerous parameters such as property value, age, income, financial history, and credit score, that are all considered before lending money. Apart from KYC documents, Income tax returns, salary statements, and other usual formalities, you have to also make sure that your property papers are in order. If there are any discrepancies, for instance, spelling mistakes in the registry, then you have to rectify them first before you can even apply for a loan. This makes the loan process much longer and difficult for everyday people.

  1. Repayment Tenure

Gold loans are short to moderately termed loans, that are usually tenured from 6 to 18 months. However, the repayment structure is flexible. Some loan schemes allow you to repay long before the maturity date. For instance, in some cases, you can reimburse the loan within a day and can receive your gold from the lender.

On the other hand, the loan amount is usually higher in the case of loan against property, which is why the repayment period can span up to 20 years. Despite the relatively lower interest rates, long-tenured loans can prove to be quite expensive in the long run. You may not realise just how massive the cumulative interest amount is, because you are paying it little-by-little.

In terms of monthly payments, with gold loans you need to only pay the monthly interest while with loans against property, you need to pay part of the principal amount and interest, making the sum paid higher.

  1. Additional charges

Both with the gold loan and the loan against property, you are required to pay a basic loan processing fee. However, additional pre-closure charges are also applicable on loans against property, which are not payable in the case of a gold loan. Thus, you are required to pay both the pre-closure charges and the processing fee, if you are applying for a loan against property.

The table below depicts the major differences between the gold loans and the loans against property:-

Characteristics Gold Loan Loan Against Property
1. Tenure of Loan Short and flexible, ranging from 6 to 18 months. Long, ranging from 1 to 20 years.
2. Interest Rate Low Low
3. Impact on Credit Score Low High
4. Pre-closure Charges None High
5. Monthly Instalments Only interest-based instalments Repayments include interests combined with the principal amount
6. Loan extension Renewable at the end of tenure No extension
7. Re-pledging of the asset Can be re-pledged without fresh documentation Can be re-pledged but with fresh and tedious documentation
8. Time to disburse Disburses within 24 to 48 hours of application Takes 7 to 30 days for the loan process to complete

Conclusion

What becomes clear from the above analysis of these loans is that generally speaking the gold loans are a much better bet as a source of borrowing. However, the ultimate choice depends primarily on your financial requirements. Today, it has become easier than ever to obtain a gold loan. However, unlike others, Rupeek Gold Loans offers you an opportunity to apply for a gold loan from the confines of your own home. Rupeek Gold Loans provides you with quick and easy access to financial assistance in the form of gold loan, at some of the lowest interest rates currently floating around in the market. The interest rates, starting at an astounding 0.89% per month, are among the most competitive out there. Hence, borrowing is made incredibly cheap and simplified by Rupeek, making it the trendsetter in the Gold loan market.