Personal loans come to the rescue when you are in need of funds for a variety of reasons. Be it a medical emergency or a financial crunch, personal loans are tailor-made to tide over such situations.
However, not every applicant is eligible to get a personal loan as lenders have various criteria that an applicant must meet when it comes to sanctioning unsecured loans. Even if you meet the basic eligibility criteria, your repayment capacity may only allow a certain amount of personal loan to be approved which may not be enough to meet your immediate financial needs. Additionally, personal loans may not be suitable if you need a very large amount of money, with a lower interest rate and longer repayment tenure so that the resulting EMI will be affordable.
So, what’s the way out? Do you dip into your retirement funds or start liquidating investments or assets? None of these options is ideal.
To get out of a situation of financial emergency, many, today are choosing to avail a gold loan or a loan against property. But which loan type is better for you and why – let’s find out.
Both the gold loan and the loan against property are secured in nature. This means that you pledge the gold or immovable property (commercial or residential), which you own, to the lender in exchange for the loan amount that is sanctioned to you.
The lender holds the collateral asset as security against the loan amount sanctioned to the borrower until such time that the loan has been repaid in full. This includes both the principal and interest amount along with any applicable fees or charges. If the borrower defaults on the loan, the lender has the liberty to recover the outstanding loan amount by possessing the pledged assets.
Here, the nature of the asset determines the amount of loan you will get. In the case of gold loans, the sanctioned amount depends on the value of the gold only. The value of any precious stones or silver, making charges, etc. will not be considered. In the case of a LAP loan, the lender will consider the market value of the pledged property and its nature to determine the maximum loan amount they can offer. In both cases, the lender will also consider other factors such as the applicant’s income, existing debts, etc. Thus, it is possible to get a higher loan amount through a LAP loan (in most cases).
The rate of interest for gold loans is fixed. Generally, it varies between 9.24% to 26%. The loan against property, on the other hand, typically offers the borrower the option to choose the format of interest between fixed and floating rates. Most lenders offer floating rates of interest, starting from 9% per annum. The interest rates for LAP loans are usually lower when compared to that of gold loans.
The eligibility criteria for gold loans are easier when compared to unsecured loans. However, one must be able to prove ownership of the pledged gold in the form of receipts. Some lenders may even request additional documents such as bank statements. Borrowers will also have to provide other KYC documents. However, the requirements for CIBIL score, etc are less stringent.
The loan against property requirements is not as easy as that of a gold loan. The general parameters for eligibility may vary depending on the lender. Having said that, there will be some factors that are common across lenders. These common criteria include age, income, property value, nature of employment, income stability, existing debts, credit score and history, and more as per the lender’s policy. The pledged property should also be completely owned by the applicant, without any ongoing mortgage or disputes.
The documentation for gold loans is straightforward and simple. You would be required to fill up and sign a loan application form, submit proof of identity and address and a couple of passport-sized photographs may also be required. Documents pertaining to ownership of the pledged gold are also required.
The loan against property documents is a little more exhaustive in nature and takes slightly longer in terms of verification. Along with your general KYC documents, you will be required to submit proof of income, employment, bank statements, as well as all property related paperwork to process the loan. Additionally, you may be required to furnish the lender with more documents if the property being mortgaged has multiple owners.
Getting a goal loan processed is pretty much instant. For anyone in need of instant cash, the gold loan is the best solution. With flexible eligibility parameters, minimal paperwork, the overall loan processing time is quick. As a matter of fact, most gold loans are approved within a span of a few hours at the most.
The LAP loan, on the other hand, requires a lot more time to be processed. Lenders will need to see the application form, verify documents, run a check on the applicant’s credit rating and history before sanctioning the loan. The lender will also evaluate the property and related documents. The loan processing time may stretch over a couple of weeks at best until the applicant is able to get the funds.
You may need to pay a processing fee in order to get the approved loan disbursed to your registered bank account. Generally, lenders may levy a processing fee of 2% on the gold loan amount. Processing fee on the loan against property is between 0.25%-2% of the loan amount sanctioned.
However, this varies from lender to lender, and some may choose not to levy any processing fee at all.
When looking at gold loan vs loan against property, the repayment tenures for gold loans are much shorter compared to the LAP. The gold loan tenure varies between 12 months to 3 years depending on the lender.
For a loan against property, the repayment period starts from 12 months and can go up to 15 years maximum. Moreover, as per the recent RBI regulations, part payment or prepayment on loans against property taken at floating interest rates for non-business purposes do not require the borrower to pay additional charges. Thus, borrowers can make part-payments if they come across additional sources of income such as a bonus from work, and repay their loan much faster.
Borrowers should bear in mind that availing a long period for paying off a loan will attract a higher amount of overall interest payout on the principal loan amount.
When it is a comparison between gold loan vs loan against property to determine which one is a better loan, the decision completely depends on how effectively the product meets your financial requirements. Having said that, most families in India possess gold and it holds tremendous value in the market. When in need of instant cash, gold loans can cater to the requirement instantly.
On the other hand, if you need a hefty loan amount, you may not have enough gold to support your requirement. Under such circumstances, a lap loan will be a better fit for you. LAP loans are also a better choice since you get sufficient time to repay the loan so that the resulting EMI doesn’t stretch your budget.