When you are in a crisis or need money urgently, try not to opt for any credit option. You must assess your needs and your financial situation and choose accordingly.
In the case of an emergency, like a sudden medical need, a wedding, or a job loss, you need to arrange for money urgently. Thanks to the different credit options available, it’s important to choose the right one. Credit cards or gold loans are also two viable options.
Among the two, a credit card is an unsecured form of loan, while a gold loan is a secured form of credit. With credit cards, a cardholder is allowed a certain credit limit each month and they have to repay it on the due billing date. On the other hand, for gold loans, customers can access funds by weighing the value of their gold assets.
In the case of credit cards, banks typically have all the details of a customer, which includes an applicant’s credit score, stability of income, existing debt, and others. Depending on your eligibility based on these details, banks may either accept or reject a credit card. In the case of gold loans, there’s not much required from a customer in terms of eligibility. Hence, it’s a more accessible option.
Among gold loans and credit cards, the interest rates for gold loans range between eight per cent to 26 per cent per annum, while in the case of credit cards, it’s much higher, between 18 per cent to 42 per cent.
Also, when it comes to gold loans, the higher the value of your gold assets, the higher will be the loan amount. Whereas, credit cards offer instant access to funds but there are limitations when it comes to your credit limit. This limit changes based on your card, your credit score, repayment history, and income stability.
Which Credit Option Should You Go For: According to experts, gold loans & credit card loans fall at the last spectrum of credit requirements. When you exhaust other types of loans one tends to decide between the two. Normally, if the requirement is for a small period say three months to a year, most people choose a credit card loan. The reason is ease of application. You just need to contact your bank for that, mostly you get the money, up to the limit already sanctioned.
But credit card loan comes at a higher rate of 18-42 per cent. So in a short period, if you pay it back you pay low interest and it is manageable. But when you need more time to pay back, a gold loan triumphs over a credit card loan.
Says Madhupam Krishna, certified financial planner (CFP), and Sebi RIA, chief planner, WealthWisher Financial Planner and Advisors, a financial planning and wealth management firm: “This is because, unlike credit cards, gold loans are secured in nature hence interest payment is less. Gold acts as collateral, so gold loans are offered by various banks in a range of 8-15 per cent per annum. Gold loans are also easily processed and you get money in one to two days. You get a loan up to 70-80 per cent of gold pledged. You also get to choose flexible equated monthly instalment (EMI) terms which may extend to three years. You may choose to pay a partial amount prematurely and convert the loan to an overdraft facility. Loan documentation is also not very lengthy and approval takes a few hours.”
“The major issue with the gold loan is that you lose your gold in the unfortunate event of not being able to pay back your loan. This can be your personal or inherited jewellery. On the other hand credit card loans are the most costly loans as there is no collateral. So, a credit card loan is not good for a long-term requirement. The amount of loans also depends on your sanctioned credit limit,” adds Krishna.
Another aspect of credit cards is that EMIs are put in credit cards as expenses. A delay or default in payment may lead to a debt trap. The chances of falling into a spiral debt trap are the reason credit card loans should not be preferred.
Gold loans are ideal for those who possess gold and need quick, low-interest funds without a strong credit history. Credit card loans are suitable for individuals with a good credit history who need instant funds without collateral but can manage higher interest rates. The choice between the two depends on the borrower's financial situation, asset availability, and repayment capacity.