- Date : 09/09/2020
- Read: 4 mins
Not all debt is the same; you need to compare options so that you can get the best deal.
You may not have considered taking debt of any kind to meet your expenses until now, but COVID-19 has made it difficult for many of us to make ends meet. Job loss, pay cut, salary deferment – these setbacks are now standard financial consequences of the pandemic. To meet living expenses such as rent and utility bills or to take care of emergency medical expenses, one can consider a gold loan or a credit card loan.
While both gold loans and credit card loans are good options, they differ in many respects. Here’s what you should know before you arrive at a decision.
A gold loan is a secured loan, which means that you’re getting a loan against an asset that belongs to you (gold). If ever you’re unable to repay the loan, you lose the gold and the financial institution recovers their money by selling it off.
Borrowing on a credit card, on the other hand, counts as an unsecured loan – you're getting the money without offering an asset as collateral. So, if you miss your payments, not only are you charged late fees, your credit score gets affected too.
2. Application process
Since a gold loan is a secured loan, the application process is quicker. There is minimal documentation and the eligibility criteria tend to be more lenient. You can typically get a gold loan disbursed within a few hours. Often, your credit score is also not required, and neither is your income proof.
If you don’t have a credit card, the process of applying and receiving one can take up to a few weeks, and your credit score and repayment capacity are critical factors in it getting approved.
3. Interest rate
Another benefit of gold loan being a secured loan is that its interest rate is lower. Right now, banks such as SBI have an interest rate of 7.5%, whereas NBFCs such as Muthoot Finance are offering 12%.
As for credit card loans, the monthly interest rate is about 3% to 4%. However, bear in mind that the annual percentage rate (APR) can range from 12% to 40%. The APR, again, depends upon your repayment history and capacity and some banks may offer a lower rate as well.
4. Loan amount
Gold loan lenders check the weight and purity of the gold to evaluate its market value and usually sanction loans up to 80% of the value. Now is a good time to consider a gold loan because gold prices have shot up sharply, with 10 gm of gold costing over Rs 50,000.
The credit card loan amount you are eligible for would depend on the kind of credit card you have, your repayment history, credit limit on the card, but typically you can expect to get between Rs 50,000 and Rs 5 lakh.
The minimum tenure for a gold loan is 3 months and the maximum is 36 months. Depending on the bank, you can pay your credit card loan in EMIs over a period of 12–48 months.
Most banks offer a maximum credit card loan tenure of up to 4 years, while some offer 5 years. However, a longer tenure would mean a heavy interest burden, especially in the case of credit cards.
Both often come with foreclosure charges, but it is as low as 1% for gold loans and typically 3% to 4% for credit card loans.
Ultimately, the only real negative of choosing a gold loan is that if you fail to repay the loan, you can lose your precious gold. So long as you have a repayment strategy in place, this should not be a concern. Read how gold loans opens up opportunities for small business.