Gold Loan vs Other Secured Loans – Which Serves Your Purpose Better?
Last Updated : June 23, 2020, 1:22 p.m.
The need for funds can arise at any point in an individual’s life. And in these situations, individuals look to opt for a loan provided by several banks and Non-banking Financial Companies (NBFCs). Any loan generally could be of two types – Secured (Home Loan, Loan Against Fixed Deposits, Loan against Mutual Fund, etc.) and Unsecured Loans (Personal Loans). In a secured loan, an individual has to pledge some kind of security to get the required loan amount, while in case of unsecured loans, the lender provides the loan without any security.
One of the most popular secured loans is the Gold Loan with which an applicant can get the required loan amount by pledging his or her gold ornaments. Individuals can utilize this loan amount according to the requirements. Whereas a Home Loan is also a secured loan but the purpose of this loan is strictly limited to house-related things such as purchase, renovation, repair, etc. Apart from a Gold Loan, there are several other secured loans that can be taken to fulfill various financial needs. Some of them are Loan against fixed deposit , Loan against life insurance, Loan against shares, Loan against mutual funds, Loan against national savings certificate.
If you are someone who is looking to opt for a secured loan but confused between Gold Loan and other Secured Loans, this article could help you choose the right option. We will be discussing the comparison between Gold Loans and other secured loans in terms of different factors such as interest Rates, Tenure, Eligibility Criteria, etc. So, keep reading!
Let’s know about Some of the Secured Loans Briefly!
As we told above how secured loans can only be taken by pledging some collateral to the lenders. Against these different types of securities, the lender provides you the loan amount. The collateral can be your Gold Ornaments, Mutual Fund Units, Life Insurance Policy, and even National Savings Certificates (NSCs). Before comparing a gold loan and all other secured loans, it is important to know about each of these loan facilities so that you can make a better decision.
First, we will talk about a Gold Loan. A person who has some idle gold ornaments or gold coins minted by banks can opt for the loan amount from the lender at affordable interest rates instantly. You only need to have gold with you and you will be good to get a loan easily.
Another Secured Loan that you can opt for to deal with your small or big financial crunch is the Loan Against Mutual Funds Units. Yes, you can avail of a loan from lenders against your investment in the mutual fund units. Instead of liquidating your mutual fund units, you can opt for a loan against it as your mutual fund units will work as a collateral.
One of the good methods to accumulate the required funds is to opt for a loan against your life insurance policy, where your policy will act as collateral. Affordable interest rates and lenient eligibility criteria are some of the benefits of this secured loan. You can also opt for a loan against your Fixed Deposit so that you don’t need to break it prematurely. The loan amount will be decided according to your FD value.
The other two secured loans are Loan Against Shares and National Savings Certificate (NSC) respectively. These investment assets can help get you the required funds to meet your financial needs. Your units of shares and NSCs will act as collateral against the loan amount.
Comparison of Gold Loan vs Other Secured Loans
Now, you have a basic idea about Gold Loan and other secured loans, it would be easy for you to understand the comparison between all these secured loans. When we talk about the comparison of Gold Loan to other secured loans, there are few factors with which we can distinguish them. These factors are Interest Rates, Tenure, Loan Amount, Eligibility Criteria, etc. We will be talking about them one after another below. Have a look!
Interest Rates
In case of any loans, whether it’s secured or unsecured, the most important thing to look for is the Interest Rate on the particular loan facility. As you know that unsecured loans have generally higher interest rates as compared to secured loans because of the pledged security in the latter. This is the reason so many individuals opt for secured loans.
Gold Loans
When we talk about Gold Loans, interest rates generally range from 9% to 20% per annum and change from one lender to another. But on an average basis, these would be 11% to 16% per annum. Apart from this, an individual can get much lower interest rates, if he or she has an existing good relationship with the lender.
The below table has interest rates of some of the top Gold Loan Lenders. You can get an idea from this.
| Gold Loan Providers | Interest Rates (In Per Annum) |
|---|---|
| Muthoot Finance | 12.00% - 27.00% |
| ICICI Bank | 10.00% - 19.76% |
| HDFC Bank | 9.50% - 17.55% |
| State Bank of India (SBI) | 7.50% |
| Manappuram Finance | 12.00% - 29.00% |
| Union Bank of India | 7.00% - 9.60% |
| Axis Bank | 13.00% |
| YES BANK | 9.00% - 15.00% |
| Canara Bank | 7.65% |
Other Secured Loans
Apart from Gold Loans, Loan Against a Life Insurance Policy is also one of the popular secured loans due to its affordable interest rates. You need to remember this – Interest Rates on a Loan Against Insurance Policy mainly depend on the premium of your policy that you have already paid and the number of times you have paid the premium. If you have paid a greater premium for an extensive period, your interest rates will be lower. Usually, it ranges from 10% to 12% per annum varying from one lender to another.
You can check the interest rates of some of the top lenders that provide a Loan Against Life Insurance Policy in the table given below.
| Lenders | Interest Rates (In Per Annum) |
|---|---|
| Axis Bank | 10.50% to 12.75% |
| Kotak Mahindra | 9.25% to 13% |
| ICICI Bank | 8.90% to 11% |
| HDFC Bank | Customized |
| Bajaj Finserv | 9.50% to 12% |
If you want to opt for a Loan against fixed deposits from the lender, the interest rates would be generally 2% to 3% above the interest paid by the particular lender on your fixed deposit. For example, if you are getting 5% interest on your fixed deposit, the interest rates on your loan against fixed deposit would range from 7% to 8% per annum. Also, it changes from one lender to another.
We are showing interest rates on Loan Against FD given by top lenders in India. Do check them!
| Lenders | Interest Rates (In Per Annum) |
|---|---|
| Axis Bank | 2% above the FD rate |
| State Bank of India (SBI) | 1% above the FD rate |
| ICICI Bank | 2% to 3% above the FD rate |
| HDFC Bank | 2% above the FD rate |
| Bank of Baroda | 10.60% to 11.10% |
Opting for a Loan Against Mutual Funds (MFs) is also considered to be a pretty good option when you are in instant need of funds. Due to affordable interest rates provided by the lenders, individuals don’t hesitate to opt for this loan facility. Since your loan amount is backed by your MF units, interest rates are lower and fall in the range of 10% to 12% per annum. Apart from this, if the applicant has a good credit score with a long relationship with the lender, the interest rates could be much lower. Also, the interest rates will be charged only on the withdrawn amount and not on the full loan amount. If you want to know about the interest rates of some of the top lenders, you can check the below table.
| Lenders | Interest Rates |
|---|---|
| Axis Bank | 10.50% to 12.75% per annum |
| State Bank of India (SBI) | 9.75% per annum |
| ICICI Bank | Depends on the investment value and market movement |
| HDFC Bank | Depends on the investment value and market movement |
| Bank of Baroda | 7.35% - 8.10% per annum For staff 7.10% per annum |
Your National Savings Certificate also can provide you the loan amount at affordable interest rates. The interest rates will be only charged on the withdrawn amount and for the time you utilize the overdraft amount. Interest rates of on loan against NSCs provided by some of the top lenders are shown below. Have a glance at them!
| Lenders | Interest Rates |
|---|---|
| Axis Bank | 10.50% to 12.75% per annum |
| State Bank of India (SBI) | 11.90% per annum |
| HDFC Bank | Customized |
| Bank of Baroda | Loan - 10.60% or 0.50% above the prevailing interest rate of NSC, whichever is higher Overdraft - 11.10% or above 0.75% above NSC whichever is higher |
Loan Amount
Everyone who opts for a loan whether secured or unsecured has this question, what will be the maximum loan amount that they can opt for? The loan amount that you can get via different secured loans tends to change from one loan to another based on several important factors. To get a clear idea about the loan amount provided by gold loan vs other secured loans, it is important to know about the maximum loan amount in each loan type. You can look at them briefly in the below table.
| Loan Type | Maximum Loan Amount |
|---|---|
| Gold Loan | 65% to 90% of Overall Gold Value |
| Loan Against Mutual Fund Units | For Equity - Upto 50% of the NAV For Debt - 70% to 80% of the NAV |
| Loan Against Fixed Deposits | 70% to 90% of the FD Value |
| Loan Against Life Insurance Policy | 80% to 90% of the total surrender value |
| Loan Against NSC | Upto 70% of the Present Value |
Gold Loan
In case of a gold loan from any lender, your loan amount depends on the overall gold value and this thing is known as Loan-to-value Ratio (LTV). In the case of a gold loan, the LTV ranges from 65% to 90% of your overall gold value. It can also change from one lender to another.
Let’s understand this through an example. Suppose the overall value of your gold is INR 10 lakh. Now, according to this, you can get a maximum loan amount of INR 9,00,000 with the minimum being INR 6,50,000.
Other Secured Loans
In the case of a Loan Against Mutual Funds, the loan amount mainly depends on the Net Asset Value (NAV) of your mutual fund unit. If you are taking the loan against Equity Mutual Fund Units, it’s usually upto 50% of the NAV, while it may be upto 70% to 80% of the NAV in case of Debt Mutual Fund Units. Other than this, you should also check the minimum and maximum loan amount set by the lender. HDFC Bank provides loan amounts upto INR 1 to 10 lakh on Equity and upto INR 1 crore on Debt MF units.
If you want to opt for a loan against a life insurance policy, you can get upto 80% to 90% of the total surrender value of your traditional policy. Surrender Value is the value that a policyholder gets from the life insurance company if he or she decides to exit the policy before the fixed maturity. Many individuals think that they can get the loan amount based on overall policy value which is not true.
For a loan against your National Savings Certificate, the loan amount depends on its present value and lenders usually give upto 70% of the present value as the loan amount. While in the case of Loan Against FD, you can get upto 70% to 90% of the overall value of your Fixed Deposit as the loan amount.
Tenure
When you opt for any kind of loan amount, you need to repay it within a definite period. This fixed period is known as the tenure. Different loans have different tenures that you can choose according to your repayment capacity and convenience. As you will be repaying the EMI amount from your monthly income, so you should be choosing the repayment period accordingly.
The below table has tenures of Gold Loan and other secured loans. You can check them!
| Loan Type | Repayment Period |
|---|---|
| Gold Loan | 12 to 84 months |
| Loan Against Fixed Deposits | Same as the Tenure of your FD |
| Loan Against Mutual Funds | Overdraft Facility for 12 months |
| Loan against Life Insurance Policy | Overdraft Facility for 12 months |
| Loan Against NSCs | One year initially, can be renewed later |
Loan Eligibility Criteria
One of the highlights of gold loan and other secured loans is all the loans have quite lenient eligibility criteria. Why? Because of the security pledged by you against the loan amount. Due to this, lenders have to face minimum to nil credit risk as compared to unsecured loans and have something to fall back on in case you fail to repay the loan. Individuals who have a low CIBIL score can also apply for secured loans without any worry of facing rejection from the lender.
Like, if you want to apply for a Gold Loan, the only thing you will need is the Gold Ornaments or Gold Coins minted by banks. Gold Loan providers only check the age and purity of your gold and based on that, you get the loan amount.
For getting a loan against Fixed Deposit from a lender, you need to fulfill only one eligibility condition that you need to have a Fixed Deposit with that particular lender. And as we told you, your loan amount will be decided by your FD amount.
In the case of Loan Against Life Insurance Policy, you need to remember that a loan is granted only against traditional insurance plans and not against the term insurance plans. Also, you should remember that you cannot opt for a loan against the life insurance policy right after you buy it. There is a waiting period of 3 years before which you can’t get the loan amount against your policy.
To get a loan against mutual funds, you should check the list of approved mutual fund schemes on which they offer this facility. So that you won’t have to face any problem while opting for the loan amount.
So, based on these factors, you would surely be in a better position where you can choose the loan according to your requirements.