Loans are the most common financial vehicles for addressing your financial demands without dipping into your savings.The reason why secured loans are preferable to unsecured ones is lower interest rates.
Advances like a
loan against property and gold loans are the two most popular financing options that can meet your fund requirements. Now, the question arises, how would you choose between these two financing options? To get the answer, let us dive deep into their details in this article.
What is a loan against property?
A loan against property is a mortgaged loan under which the lender disburses the fund after you put your real estate asset as collateral. The mortgaged assets may include commercial office space, residential houses, land, factory premises, etc. The lender retains the charge of the property papers until you repay the loan (principal amount and interest component) in full.
How does a loan against property work?
When you submit your
mortgage loan application, the lender first verifies your KYC and property-related documents. If they are found satisfactory, the lender sends the surveying officer to the property site to assess the property's health. After that, they determine the property's current market value by considering the circle rate and various other factors.
Financial institutions often approve loans for between 40% and 75% of the property's value. However, remember that factors such as your
credit history, income, and debt-to-income ratio also affect the loan value.
What are gold loans?
Gold loans are a secured form of financing where you avail funds by pledging the gold items you possess. Financial institutions usually accept gold as collateral for carats ranging between 18 and 24.
How does a gold loan work?
When pledging your gold as collateral, the financial institution's executive evaluates the gold purity by checking the hallmark imprint. After ascertaining the gold’s current market value, they conduct a credit appraisal by assessing your credit report, earning potential, etc., to determine the loan amount to be sanctioned.
Loan against property vs Gold loan: Know the difference
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Collateral
Both a gold mortgage loan and a loan against property are secured forms of financing. Under a gold loan, you can mortgage gold jewellery, silver items, precious stones, etc., to obtain funds. But remember that the making charges of the jewellery are not included while determining the gold loan value.
On the other hand, under a loan against property, you can mortgage your office space, manufacturing plants, residential houses, factories, etc. However, some financial institutions sanction loans only against commercial real estate. Thus, check this condition with lenders before submitting your loan application.
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Loan amount
Gold loans are best suited for borrowing small sums of money that typically run up to several lakhs of rupees. However, a loan against property can get you much higher amount of loan that can go as high as 15 crore rupees.
Also Read: Home Loan vs Loan Against Property: What should you choose -
Rate of interest
The gold loan interest rates are usually fixed by financial institutions based on market conditions. However, you can select between a fixed and fluctuating interest rate when it comes to mortgage loans. The advantage of choosing floating rates is that you won't have to pay any fees if you decide to foreclose your loan.
In terms of affordability, gold loan interest rates can go up to 24% or even more. The reason is the significant price swings for gold. The likelihood of the 24-carat rate remaining the same is slim if you have opted for a gold loan and the rate was Rs 52,000 per 10 grams at the time of your loan application. In such cases, if you default on your loan and the gold price crashes, the lender will have trouble recovering their dues. To offset these possible losses, lenders charge higher interest rates on gold loans.
On the other hand, the value of the real estate generally appreciates over time, making it easier for the lender to recover both the outstanding principal and interest component in the event of borrower’s default. Thus, the interest rates for loan against property are kept lower than for gold loans.
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Documentation
The documentation required for loans against property is more than that for gold loans. In addition to KYC papers, you will need to provide a few other documents:
- No Objection Certificate if the property is owned by multiple people
- Property's registration papers
- Insurance papers for the property
You might be aware of the importance of the first two documents. But remember, your lender won't approve you for a loan if the property is not secured by insurance. Insurance provides additional security to the lenders. If the property gets damaged due to a natural calamity or you fail to repay the debt due to the reason covered in your policy, the lender can still recoup the outstanding debt.
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Repayment tenure
Most lenders offer gold loans for a maximum repayment period of 24 months. Whereas, in mortgage loans, the repayment tenure can be as long as 15 years. With a longer tenure, you have more time to organise your finances and achieve the objective for which you took out the loan.
Also Read: Beginner’s Guide For Taking A Loan Against Property To conclude
Whether you should take a gold loan or loan against property depends upon your specific financial situation and requirements. A loan against property offers a higher loan amount, lower interest rate, and longer repayment tenure. However, a gold loan would be the better option if you need small amount of funds for short-term with minimum documentation.
