Why Is A Gold Loan Better Than A Credit Card Loan?

A person can fall on bad times anytime. It could be due to a medical exigency, a sudden burst of expense that was unforeseen and so on. In an ideal scenario one should plan for an emergency fund and save it in a bank account or some liquid saving instrument or even cash.

However, many a time one may not have the capacity to generate such a savings for short-term requirements. A loan from a bank or a non-banking finance company can be a saviour in such a period.

There are various forms of loans that one can tap including a plain vanilla personal loan. On the flip side, there are some other options like a gold loan as also a credit card loan.

Gold Loan

A gold loan is a form of a secured loan or borrowing against a collateral. As the name suggests, it is advanced against the yellow metal. Gold loan as a product has existed for centuries in the unorganised sector with the village moneylender offering the money against gold products, essentially gold ornaments, and utensils.

In the modern era, gold loans are largely advanced against gold jewellery, though one can also use gold coins issued by a commercial bank to avail a loan against the coin with the same bank.

Lenders assess the purity and weight of the gold in the ornament and after accounting for a loan to value ratio, lend up to 75% of the value of the gold in the ornament. Notably, the value of any other precious stones is not factored in while calculating the value of the collateral and therefore only the value of the yellow metal is captured.

Credit Card Loan

These are auto-approved loans that credit card issuing companies offer to their existing card customers. Credit card companies assess the creditworthiness of the borrower and track record for which they have a ready history to offer additional credit to the customer.

As against a conventional credit on the card, which is offered on an interest-free basis for one to 1.5 months, a ‘loan’ from the credit card company comes tagged with an interest rate like any other borrowing, though one can choose the repayment period or tenor and thereby control the total interest outgo.

Why Gold Loan Is Better

A gold loan is often considered the best form of personal borrowing. This is because of various factors:

• Low Interest Rate:

As a collateral-backed loan, these loans come with the lowest interest rate. The annual interest rate charged for a gold loan is often half or even less than that for a personal loan or a credit card loan.

• Flexibility:

Since a gold loan comes with a security, providing additional comfort to a lender that it would be repaid, lenders are open to customise the loan terms including tenor and make it more flexible for the borrower to pay back and then release or get possession of the gold ornament.

• Credit History:

Unlike a credit card loan that inherently is offered after the credit card issuer scans the credit history and credit score of the borrower, gold loans do not come tagged to past credit behaviour. This allows even a person who may have defaulted on a personal loan in the past and thereby has a low credit score or creditworthiness to still avail a loan. This is because the prime factor in a gold loan is the value of the yellow metal in the ornament being placed as a collateral.

• Swift Approval:

In the past, getting a gold loan used to be a task and involved physically going to a branch of a lender and then do the transaction. Now, one can expect a door-step service where the representative of the lender comes to value the gold and then instantly approves the loan amount while securely taking temporary possession of the collateral. This makes availing a gold loan a simple process.

• Amount:

Typically, a credit card issuer would offer a pre-approved loan based on the creditworthiness. Typically, this gets restricted to a few lakhs and usually tapers off at Rs 5-7 lakh at the top end. However, gold loans do not have such restrictions and the amount it solely dependent on the weight and purity and thereby the value of the pledged gold ornament. If one has a large stash of family gold jewellery the loan amount can go up much higher.

Conclusion

A gold loan is the best form of personal borrowing for a short term as it comes with lowest interest rates, much more flexibility in terms of repayment and also the maximum amount that one can borrow if one has in his or her possession a lot of gold ornament.

IIFL Finance offers gold loan at competitive interest rates through a swift digital process and promises to process applications quickly. IIFL Finance doorstep service allows borrowers to skip going to the company’s branch office for paperwork and instead complete the process while sitting at their home.