Which one should you choose: Gold Loan or Credit Card Loan?
Everyone needs financial assistance when they are hit by a crisis, such as a medical emergency or a crisis in business. In such times, borrowing from friends and family may not always be the solution. What is the next best available option? A loan.
| Features | Credit Card Loan | Gold Loan |
|---|---|---|
| Collateral | No collateral is required | Gold is needed as collateral |
| Interest Rate | Higher interest rates can vary from 24 - 40% p.a. | A gold loan being secured comes at a lower interest rate |
| Loan amount | Loan amount depends on the credit limit, which depends on the income level | Loan amount depends upon the amount and value of gold offered as collateral |
| Tenure | EMIs on credit cards can be paid from 3 months to 48 months. | Gold loans are mostly offered for a year |
| Documentation | Credit card loans are unsecured; hence extensive documentation is required | Identity and address proof are the only two documents that are required< |
| Credit history and CIBIL™ | Credit history and CIBIL™ score play a crucial role. | Credit history and CIBIL™ score have no role |
(i) Interest Rate
The first and the foremost concern with any kind of loan is the interest rate. The interest rate on credit cards varies between 2.5-3.5% per month or 24-40% per annum. Also, the interest rate can vary from person to person based on their credit profile, i.e., customers having better repayment history, stable income source, and a better CIBIL™ score get a better interest rate. CIBIL™ score indicates the ‘probability of default’ of the borrower based on their credit history. Higher the credit score, better the credit limit as well as lower interest rate, and vice versa.
In the case of gold loans, the interest rate varies from 7.1% to 29% per annum, depending on the banks. The interest rate on gold loans depends upon the price of gold in the market, the rate of inflation, and the relationship with the lender.
Will the CIBIL™ score affect the rate of interest on gold loan?
No. Since lenders do not consider the credit profile of the borrower, the CIBIL™ score will not affect the rate of interest.
Although, at the outset, it is clear that the interest rate on gold is significantly lower than on credit cards.
(ii) Loan Amount
The loan amount or the credit limit depends on the income of the individual holding the credit card. For example, a person withdrawing INR 1 lakh as a monthly salary will be eligible for a higher credit limit compared to a person withdrawing INR 10,000 a month.
On the other hand, the amount of gold loan will depend upon the weight and purity of gold given in the form of collateral. In the case of gold loans, institutions sanction loans up to 75% of the market value of the gold.
(iii) Application process
A gold loan is secured; hence the lender does not dig into the credit profile or income proof of the borrower, and the loan is generally provided within a few hours of application.
Eligibility criteria for gold loan:
Any individual above 18 years of age and less than 60 years who owns gold can apply for a gold loan.
How to apply for a gold loan?
Step 1: Provide the gold you intend to offer as collateral to the lender.
Step 2: Provide identity proof, address proof & two recent passport size color photographs.
The loan is disbursed within a few minutes of approval. A credit card application process, on the other hand, can take from days to weeks. Since the loan is not secured and it is extended based on the credit profile of the borrower, the lender performs extensive credit checks to verify the credibility of the individual applying for the card.
(iv) Loan tenure
For gold loans, the minimum tenure varies from 12 months to 36 months, while credit card loans can be paid in EMIs until 48 to 60 months, depending on the issuing bank.
(v) Foreclosure charges
A foreclosure charge or a pre-payment penalty is the extra amount that lenders charge for closing the loan before the loan tenure.
Any individual holding a credit card can convert an online transaction amount into equated monthly installments. Such an amount can be converted into EMIs at the time of online purchase or post-purchase. Suppose the cardholder converts an INR 30,000 transaction into EMIs payable as INR 10,000 each month. Now, at the end of the second month, they wish to pay the installment for the third month as well. In such a case, the cardholder will be liable to pay foreclosure charges which can be as high as 3% of the outstanding amount. In this case, they shall be liable to pay INR 300 as foreclosure charges. In the case of a gold loan, banks do not charge any foreclosure charges if the loan is closed after six months from the loan date. However, if the loan is closed before six months, the bank may charge 2% of the principal amount as a penalty. Institutions like Shriram Finance do not charge any foreclosure charges.
(vi) Non-payment of loan
The business of lending is never risk-free since the borrower can default on repayment of the loan. If the borrower who has availed of the gold loan fails to repay the loan, the lender will sell off the gold in the open market and recover the principal amount as well as the interest from the sales proceeds. Any balance sum after adjusting the loan and the interest amount is returned to the borrower. On the other hand, a credit card default can take a heavy toll on the borrower’s profile. Clearly, gold loans come with a wide area of benefits over credit card loans. Also, the lender is responsible for ensuring the safety of gold offered as collateral; hence the borrowers can save rental charges on bank lockers needed for the safekeeping of that gold.
