In today’s world, entrepreneurs need capital to start or expand their businesses. When it comes to getting a loan, there are two main options: a gold loan and a business loan. Both of these loans have their advantages and disadvantages, and it can be difficult to decide which one is better for your needs. In this blog, we will compare and contrast the two options to help you make an informed decision.
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What is a Gold Loan?
A gold loan is a type of secured loan that is provided by banks or non-banking financial institutions (NBFCs). As the name suggests, this loan is secured against gold jewellery or ornaments that you pledge as collateral. The amount of loan that you can avail of depends on the value of the gold pledged.
Advantages of Gold Loan
Easy to Avail: One of the biggest advantages of a gold loan is that it is easy to avail. Banks and NBFCs have simple and straightforward procedures for gold loans, which means that you can get the money quickly.
Low-Interest Rates: Gold loans are secured loans, which means that the interest rates are lower compared to unsecured loans like personal loans or credit cards.
No Credit Score Required: Since gold loans are secured loans, banks and NBFCs do not check your credit score before approving the loan. This makes it an excellent option for people who have a low credit score or no credit history.
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Disadvantages of Gold Loan
High-Value Collateral: While gold loans have lower interest rates compared to other loans, they require high-value collateral in the form of gold jewellery or ornaments.
Limited Loan Amount: The loan amount that you can avail is limited to the value of the gold that you pledge as collateral.
Business Loan
A business loan is an unsecured loan that is provided by banks or NBFCs to help entrepreneurs start or expand their businesses. Unlike gold loans, business loans do not require collateral. Instead, the loan amount is approved based on the borrower’s creditworthiness and ability to repay the loan.
Advantages of Business Loan
No Collateral Required: Business loans do not require collateral, which means that you do not have to pledge any assets to get the loan. This is an excellent option for entrepreneurs who do not have high-value assets to pledge as collateral.
Higher Loan Amount: Since business loans do not require collateral, banks and NBFCs are willing to lend higher amounts to borrowers. This means that you can get more capital to start or expand your business.
Disadvantages of Business Loan
High-Interest Rates: Business loans are unsecured loans, which means that they have higher interest rates compared to secured loans like gold loans.
Strict Eligibility Criteria: Banks and NBFCs have strict eligibility criteria for business loans, which means that not everyone can avail of this type of loan. You need to have a good credit score, a stable income, and a sound business plan to qualify for a business loan.
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Business Loan And A Gold Loan - Which is Better?
Here are some notable differences between the two loan options that will assist you in determining which option is better – a gold loan or a business loan.
Security
A gold loan is a type of secured loan where you offer your gold as collateral, whereas a business loan is an unsecured loan that does not require any collateral. Your eligibility for a business loan is determined based on your company’s financial health, credit score, and other obligations.
Interest Rates
Since gold loans are backed by collateral, the initial interest rates are typically lower than business loans, which carry higher borrowing costs between 10.49% and 25%. In comparison, gold loans have interest rates ranging from 9% to 30%, depending on the borrower’s background.
Loan Duration
If we consider loan tenure, business loan top-up is the best option. A gold loan can be extended for up to 30 years, while a business loan has a maximum term of 5 years. The gold loan can be extended for five more years.
Risk Factor
Applying for a business loan poses almost no risk to your valuables, as these are unsecured loans. In contrast, gold loans are secured loans, and failure to repay the loan may result in the lender selling your valuables.
Loan Processing Time
Getting a gold loan may take some time, as borrowers need to provide KYC documentation and gold assets as collateral. Once the gold is valued, the loan is disbursed. In contrast, lenders provide instant loans online for business loans. After borrowers submit their applications online and upload supporting documents, the funds are typically released within a couple of hours.
Charges
For all financing options, processing fees and servicing costs are charged. You may also be required to pay gold appraisal fees if you take out a gold loan. The list of fees for business loans is quite typical. Depending on how much you borrowed, the lender may require you to pay insurance premiums.
Final Words
After comparing gold loans and business loans, it will be easy for you to select the best option based on your needs and eligibility. If you have a poor credit rating or assets equal to the amount you require, it is preferable to opt for a gold loan. Although gold loans provide a temporary solution, business loans are more versatile and can be used for a variety of financial needs.
Applying for and maintaining a business loan is hassle-free, and they have higher eligibility and longer terms. Business loans are now a common choice for borrowers seeking the quickest and most convenient solution to any financial need. Those who need loans for long-term expenses typically prefer business loans.
Click here to connect with one of the financial experts to get a clear idea of availing of machinery loans without security.
