The main reason for the rate differential in the personal loan is because personal loans are unsecured, while, gold loans are secured.
New Delhi: In order to take a short term loan or to avail any other credit facility, a person is required to pay a mutually agreed rate of interest on the borrowed amount. The rate of interest on the loan amount varies accordingly with the quantum of money borrowed, sources of income, past repayment history, credit score, the potential to repay the borrowed amount and several other factors. A person with short term requirements can take the help of credit cards with which a predetermined credit can be availed and that too without any interest.
When it comes to the requirement of generous amount of money, a person is obligated to take the help of long-term credit facilities offered by the bank such as personal loans, gold loans, vehicle loans, home loans, education loans, etc. For personal requirements, most of the people get confused between the option of a personal loan or gold loan. The rate of interest levied by the bank on a personal loan is generally 2-5 per cent higher as compared to the interest rate applicable on a gold loan.
The main reason for the rate differential in the personal loan is because personal loans are unsecured, while, gold loans are secured. That implies, if a person is not able to repay the gold loan for whatsoever may be the reason is, the bank is eligible to fulfil its receivables obligation by equating the gold deposit, while, there is no other option with the bank if a personal loan customer defaults on loan repayment.
Gold loans are far better as relatively compared to personal loans. The preference for gold loans is due to the low rate of interest levied on the principal amount, availability of higher loan amount as vs a personal loan, quick disbursement, minimum documentation, higher repayment flexibility, and other terms & conditions applied by the bank.
Moreover, a person who is having no credit history or a slightly bad credit profile can also avail gold loans from a bank or any other non-banking financial corporation. Whereas, on the other hand, personal loans carry a high rate of interest as they are non-collateralized loans, personal loans do involve a lot of procedural due diligence, less flexibility in repayment process and low chances of high-quantum loan.
The final decision of availing a gold loan or a personal loan completely depends on the respective profile of the person, requirement, objective, repayment abilities, availability of gold and several other factors.