Which is better Loan against Property or Gold Loan?

At times there can be situations where a person is in urgent need of finances or funds and the best option to have access to the required fund amount is getting a loan. Today we have different loan options that are tailored as per the need of the person. In this category two of the most popular type of loans namely; Gold Loan and Loan against Property which can be availed by a person at time of need. But the dilemma arises here about which one of these is better option for availing. In this article we are comparing the advantages and disadvantages of both types of loans and when to avail them.

Gold Loan

Gold Loan:

In India, possession of gold is highly appreciative, irrespective of the financial situation of a person. Most of the people do own some quantum of gold or gold jewelry. Using gold in time financial crunch is the best possible way. Gold Loan are offered by various banking and non-banking institutions against the gold that a person offers as security. The applicant has to mortgage the gold jewelry or the gold in spite of selling it during any financial emergency or situation. The concept of Gold Loan started as one of the most popular loan type, but over the years it has lost its sheen or value.

Advantages:

Once very popular type of loan scheme, Gold Loans are famous because of the following advantages and benefits-  

  • Easy to avail: Gold loans are quite easy to avail. This makes them the best source for usage at time of financial crunch. Most of the Non-Banking Financial Companies (NBFCs) offer this type of loan. The processing time for gold loan application is less and one can easily avail the approved funds in a few hours. It is a type of instant loan.
  • Availability of flexible schemes: This type of loan offers schemes that flexible. One can choose various schemes that are offered by the NBFCs.
  • Limited repayment: In cases where the borrower is unable to pay the loan amount during the tenure, the bank takes over the possession on the pledged gold or jewelry to recover the gold loan amount. Unlike the unsecured loans, the borrower does not face any unwanted recovery problem.

Disadvantages:

Getting a gold loan might be very easy and hassle-free but still it has some disadvantages that make it not so ideal to be availed-

  • Interest rates are high: The rate of interest for gold loans is cheaper than other types of personal loan. These are offered to the public at 12-16% interest rate per annum, compared to 15-26% rate of interest paid for personal loans.
  • Lower Loan-To-Value (LTV): In the recent years, the NBFCs have been barred by the Reserve Bank of India (RBI) from offering gold loan at the LTV ratio that exceeds 75%. This means an applicant can get a loan amount against the gold for up to 75 percent of its value which also includes the processing charges and fees.
  • Shorter tenure period: The maximum tenor for Gold Loans is one year. This means if a person is able to pay the loan amount in this short repayment period then they can avail the same.

Loan against Property:

Loan against property (LAP) is a type of secured loan in which a person can avail funds at time of financial emergency. This is provided by the banks when the applicant pledges a property for security to get the loan. The value of the loan is calculated through the value of the property in the market place and as per the repaying capacity of the applicant.

Advantages:

The loan against property has the following advantages over the gold loan-

  • Lower rate of interest: LAP is a type of secured loan which is provided by the banks at lower rate of interests. The interest rates are as low as 12% per annum up to a maximum of 16%.

Since LAP is a secured loan for which the interest rates are lower and range between 12-16% on an average compared to 16-22% for a Personal Loan or gold loan.

  • Offered by both banks and NBFCs: Unlike Gold Loan, loan against property is offered by both banking as well as non-banking institutions. One can choose the lender which suits them the most according to their preference.

Disadvantages:

Following are the disadvantages of the loan against property which cannot be avoided-

  • Stringent terms and conditions: Unlike Gold Loans the terms and conditions associated with the eligibility criteria for Loan against Property in India are complex, lengthy and strict. In cases of default in repayment one is likely to get penalties that can increase the financial stress of the borrower.
  • Time consuming loan procedure: The time taken to process a Loan against property and its approval can be time constraining and cumbersome. This is because the banks or the NBFCs takes time in evaluating the pledged property’s market value, verifying the legal docs and checking other background verifications for approval. This makes it incapable of being an instant loan.
  • Tougher and stricter rules for non-repayment: In case the borrower is unable to repay the loan amount, the lender gets the right to sell the pledged property to recover the debts and dues.

Conclusion:

If a person is need for quick money or funds for a very short period of tenor, then gold loan is the ideal and the best way of availing funds. But in case a person wants loan of higher value and for longer period or tenor, then loan against property is to be taken as an option.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.
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