They come with lower interest rates and huge tax exemptions. But then, India is a nation that is fond of gold. Everyone buys gold be it for investment, occasions, or citing auspicious reasons. Which is why the number of people applying for a gold loan is also increasing. Gold loans, however, dazzle a little less given their high interest rates and other demerits. So why is a home loan cheaper than a gold loan? Let’s discuss.
Low Interest Rates
There is less credit risk when it comes to home loans. It is the debt that one incurs when he/she buys a new home. The house stands as a security against which one can avail the loan. Since the decision and planning of buying a new house is a long-term decision. The rates of interest may decrease, thus making it pocket-friendly.
Gold loans, on the other hand, are expensive. The highly volatile prices of gold results in the interest rate of gold loans going up as the RBI seeks NBFCs to maintain a minimum LTV.
Low Risk Rate
Home loans are mostly planned loans taken to buy a new house. The idea of buying the house and the planning to avail a financial aid will be on a person’s mind for a long time. Thus, home loans are taken for a definite, productive purpose of building an asset. Thus, they are considered to be safer.
Gold loans, however, are almost like secured personal loans. This is because they are taken as a last resort to meet certain urgent requirements – they can be any personal emergencies. They might be non-productive as there are no definite assets one is availing the loan against. This makes it slightly riskier.
Assessment By Banks
Banks first do a background check on the customer applying for a home loan. A person with a good CIBIL score becomes favourable to avail the loan. They check if the customer has a stable income score, credit scores, and repayment capacity before sanctioning the home loan.
Gold loan today, are easy to avail. They are ideal for financial emergencies and thus require minimum documentation. The overall processing time is less and the loan can be approved within a few hours. This comes with a risk associated with the customer’s profile. In some cases, the repayment capacity too may be lower. This results in the acceleration of the interest rates and the processing fee.