Shall I Opt for a LAP or Gold Loan? Which is Cheaper

Indians are traditionally known to invest in real assets like Gold and Home for their future rather than relying on long term investment plans or retirement plans. As a result, a majority of Secured Loans are pledged against gold and housing properties here.

When it comes to needing financial aids, nothing works better than a bank loan. Not only do loans prove to be an excellent measure to acquire some much-needed cash flow, but also help the borrower reap some additional benefits such as tax rebates, improved credit score and the opportunity to use the funds as and when required.

Opting for Gold Loan or Loan Against Residential Property is one of the easiest ways to raise funds without adding an additional burden to your financial situation. However, when compared, the two will fetch you differently. Let’s understand which one the two is a better choice and why Mortgage Loans are cheaper than Gold Loans.

Loan Against Property

Well, Loan Against Property is borrowed by pledging a residential or commercial property. The expected loan amount is usually 70 to 85 percent of the market value of the property. It is a fairly structured loan, which is offered at a competitive rate of interest, with a fixed tenure, and repayment schedule.

Gold Loan

As the name suggests, Gold Loan can be acquired by pledging gold jewellery or gold coins as collateral. In this case, the expected loan amount is usually up to 90% of the market value of the gold. When compared to LAP, Gold Loans attract a higher interest rate. However, what makes them appealing to many borrowers is the fact that these loans offer flexible repayment schedule, and one can keep the loan active for years at end, simply by paying the interest.

Here are some of the parameters which will help you determine, which of the above loan options will be more beneficial for you.

Interest Rate

The interest rate is the leading factor that determines the cost of a loan. Currently, you can avail a Loan Against Property at a starting range of 9%, while the rate of interest for Gold Loans is available at 10.55% to as high as 28% per annum.

Processing Fee

The processing fee is a charge levied by the bank for reviewing your loan application and verifying your documents. It will vary for both products according to the bank’s policy. Generally, it would be between 0.5% to 1% of the loan amount.

Tenure

The tenure of the loan directly depends on the loan amount. Most people opt for LAP for a period of 10 or 20 years. A Gold Loan, on the other hand, is availed for a small term, say, 1 year to 5 years. Hence, opt for a Gold Loan if you are sure of repaying the entire loan amount in a considerably short time span.

Disbursal Time

It may take anywhere between 5 to 25 days to disburse a Loan Against Property, owing to the verification of various documents, and property valuation, which is both time-consuming processes. For a Gold Loan, all you need to do is visit the lender’s office with the required Gold. Once there, the lender will assess the quality and quantity of the gold and will sanction your loan accordingly. While most lenders disburse the Gold Loan amount within a few hours, some may take up to 2 days for disbursal.

Tax Benefits

You cannot claim any tax benefits or deductions for Gold loan or LAP. However, you can continue to claim the tax benefits in case the property pledged has a Home Loan. A Home Loan comes with impressive tax benefits, both on the Principal Repayment as well as the Interest Paid towards the loan, under section 80C and Section 24(b) of the Income Tax Act.

Risk Propensity

Defaulting on the repayment of a secured loan for a continued period may lead the lender to seize the collateral, and even sell it off. Hence, it is strongly advised that these loans should only be acquired with an efficient repayment plan in mind.

Eligibility

Eligibility for Loan Against Property includes a wide array of criteria such as a stable source of income, a good credit history, and more importantly – the ability to make the down payment, which is often 10-20% of the market value of the property. However, when applying for a Gold Loan, the only aspect that counts is the repayment ability of the borrower.

While LAP is more cost-effective than a Gold Loan, the final choice of the product shall be based on your requirements. If you are looking for some quick cash and are sure of your ability to repay the same within a short period, a Gold Loan is the better alternative for you. While if you need a loan for the long term at an affordable EMI plan, say for a child’s education or business expansion, LAP could be the ideal choice.

Also Read: 5 Rules to Follow When Purchasing a Loan Against Property

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