The decision to choose what loan suits your needs better can be a bit overwhelming. Here, we will look at gold loan vs credit card loan, and which one should you choose.
Differences between a Gold Loan and a Credit card loan
The following are the differences between a credit card loan and a gold loan based on the following parameters
- Collateral – Gold loans are secured loans while credit card loans are unsecured loans. Gold loans can be obtained by pledging a gold article. The interest rate on gold loans is much lower than that of a credit card loan. This is because, for the lender, a gold loan offers collateral and hence is much safer than a credit card loan.
- Credit History – Credit history is an important factor that lenders check while disbursing credit card loans. However, since gold loans are secured, there is no need for a good credit score. You need a credit score of at least 750+ for a credit card loan with an attractive interest rate while for a gold loan, the credit score doesn’t matter so much.
- Loan approval and fund disbursal process – Gold loans can be availed within a few minutes as there is minimum documentation and background checks needed. Credit card loans are also quick but might take some time for documentation and checks.
- Loan amount – Credit card loans can be availed of up to the credit limit assigned to you. Also, exhausting your total credit limit will bring your credit score down. With a gold loan, you can avail of a loan amounting to 75% of the gold article value pledged. An additional loan on top of the gold loan is also available sometimes.
- Flexible repayment – Gold loan repayment is flexible. You could pay via flexible installments, repayment of just the interest during the tenure of the loan, and payment of the principal at the end of the tenure. You could also choose to repay the interest along with the principal at the end of the tenure of the loan.
- Tenure – Gold loans are usually offered for a period of 6 months whereas credit card loans could be offered for 12 months.
- Documentation – For a credit card loan, you need a good credit score, income proof, and a good repayment history. While for gold loans, other than the gold article to be submitted as collateral, you need to submit a basic KYC form.
Key Highlights for Gold loans
- Secured loans - Gold loans need a gold article as a security in order to get the loan approved. A credit score is almost irrelevant as anybody with a gold article can apply for a gold loan.
- Interest rates - Gold loan interest rates start from 7.35% and go up to 29% per annum.
- Loan amount - The gold loan is available from Rs.1500 to Rs.5 crores.
- Repayment period – The repayment period is usually flexible ranging from 7 days to 6 months.
- Minimal documentation – Gold loans need minimum documentation and usually a great credit score isn’t needed as well. A gold loan is approved based on the value of the gold pledged as security.
- LTV ratio - The loan-to-value (LTV) ratio for gold loans is decided by RBI at 75%. What this means is that you can get a loan worth 75% of the value of the gold pledged.
- Usability – Gold loans can be used for a variety of purposes. The lender doesn’t have a restriction on the usage of the gold loan. This may include vacation expenses, emergency medical expenses, or educational needs.
- Processing time – Minimal processing time is required for Gold loans as there is minimal documentation required.
- Types of Fees – The types of fees associated with a gold loan are processing fees, penalty fees for non-payment of interest, late payment charges, etc.
- Rebates – Some lenders might want to offer a rebate of 1%-2% based on the borrowers’ financial discipline. Borrowers with a good repayment history might be offered a rebate.
Key Highlights for Credit card loans
- Pre-approved loan – Most of the credit card loans are pre-approved based on your credit card repayment history.
- Payment on EMI available – Credit card loans can be repaid in EMIs making it easy for the borrower to plan the repayments.
- Balance transfer on EMI available – Some banks also offer loans to cover other banks’ credit card expenses. You can transfer the balance at a lower interest rate.
- Credit limit – Most banks will allow you to take a loan up to your credit limit. However, some might agree to go over the credit limit too.
Conclusion
Gold loans are considered to be a better choice as compared to credit card loans because of the lower rate of interest that you can avail of. They also offer flexible repayment terms which makes it easy for the borrower to plan their finances. Gold loans do not need a good credit score for loan approval however, they need a gold article to be pledged as collateral. The disadvantage of a gold loan is you might not be able to recover your collateral if you fail to repay the loan. On every other ground, gold loans seem to be a better option than credit card loans.
FAQ of Which one should you choose Gold Loan or Credit Card Loan
1:Why is a gold loan better than a credit card loan?
A gold loan is a secured loan and hence the rate of interest is much lower than that of a credit card loan. The gold loan also offers various repayment options.
2:Do I need a good credit score for a gold loan?
No, lenders do not pay a lot of importance to a credit score while disbursing a gold loan. Since gold loans need collateral, lenders’ risk is reduced and hence the credit score is not needed.
3:What happens if I don’t repay the gold loan?
In the event of non-repayment of a gold loan, the gold article pledged as collateral will be auctioned by the bank/lender to recover their loaned money.