A loan is one of the most sought-after ways to fuel dreams and ambitions. They also offer the best respite in stringent financial situations. There are several types of loans i,e, personal loan, home loan, car loan, mortgage loan, payday, loans, and much more. But most of the people opt for the Gold Loans and Loan Against Property.
Both Gold Loan and Loan Against Property are secured and the borrower is required to offer collateral on the table to take a loan. While personal loans are the best for short-term needs, these two loan types are well-suited for large requirements. But which one of the two is best for you? In this article, we look at the advantages and disadvantages of these two loan types.
What is a Gold Loan?
Gold loans are secured loans. A borrower offers gold as collateral to the lender in return of a loan.
Advantages of a Gold Loan
- Easy Processing: As opposed to loans against property, gold loans are relatively easy in processing. They are ideal for family emergencies. A borrower can avail of the approval of a gold loan in a couple of hours. It takes a maximum of a day to get the loan amount disbursed in the name of the borrower in the case of a gold loan.
- Flexible Schemes: There are various schemes offered by the lenders. For example, a borrower can only pay the interest amount during the tenure and pay the principal amount at the end of the tenure. This type of flexibility makes the gold loan a popular choice.
- Low risk: The maximum that a lender can do on account of the borrower not repaying the loan is to confiscate the borrower’s mortgaged gold. There are no recovery woes as the ones which arise with personal loans or loan against property.
- High Interest Rate: Due to the constant movement in the market value of gold, the interest rates of gold loans are high.
- Low Loan to Value Ratio: RBI requires lenders to maintain a minimum loan to value ratio. This number has been constant at 75% for the past few years. This means that you can only avail 75% loan of the market value of the mortgaged gold. For example, if your gold is worth Rs 1 lac, you can only avail a loan up to Rs 75000. When you add processing fee and other charges, this amount reduces further.
What is a Loan Against Property?
When a borrower mortgages their owned property or land in return of a loan, it is known as a loan against property.
Advantages of Loan Against Property:
- Low Interest Rates: Since the mortgage is of high value, the interest rate of a loan against property is lower than that of a gold loan. The interest rate of a LAP varies from 12-16% while for a gold loan it is 16-22%. A borrower can plan their monthly payments with a loan against property EMI calculator available online.
- Longer Tenure: A loan against property can be taken for a tenure of up to 20 years. While a gold loan can be only taken for a maximum of 1 year. However, the tenure for a gold loan can be renewed.
- Longer processing: Loan against property requires a six-stage process. The lender carries out several verification processes for approval. The mortgaged property is evaluated for its market price as well as verified legally for any disputes. This procedure takes time and effort by the lender as well as the borrower.
- Stringent Terms & Conditions: The tax benefits are limited in the case of loan against property, even for EMI payments. The terms and conditions of a LAP are strict and if flouted, the borrower is charged with a heavy penalty.
This list offers you all the information you need to choose the type of secured loan you should opt for. Apart from that, there are more benefits and disadvantages of these loans. Select the one which suits you the best and does not give any financial stress to you in the future.
But before choosing any of the loans must check the eligibility criteria, interest rates, terms, and conditions & all the necessary information which requires for smooth processing, yet you have not to face issues in future.