A line of credit (LOC) is a financial arrangement between a borrower and a lending institution, usually a bank. The borrower can access funds from LOC at any time, but he/she must not exceed the assigned credit limit. The person should also make timely minimum payments or pay the entire outstanding balance. If you opt for a LOC, you can request for a certain amount, but it is not necessary to use all of it. You can rather spend the amount as per need, and then pay interest only on the amount you draw.
The above does sound promising because of easy repayment terms and cash-flow flexibility. But what if we tell you that there is a better borrowing option, like a gold loan for your immediate financial needs?
What is a Loan against Gold and its Benefits?
A loan against gold is a secured loan, where you have to keep the gold asset with the financial institution, as collateral, against which a lump-sum amount is disbursed to your (borrower’s) bank account.
- It is less costly than unsecured forms of borrowing, such as lines of credit, and keeps your urge-to-spend, in check. Once you repay the loan against gold (entire principal and interest amount) the collateral gold is returned to you.
- The loan scheme can have several repayment offers such as overdraft facility, EMI, and bullet repayment (pay only interest amount till the end of tenure, and the principal amount thereafter). You, thus have more flexibility in terms of repayment.
- Tenure of this loan is up to a year or two, restricting you from extending the debt cycle over the stipulated period. A line of credit however, has no specific time-frame of repayment, as it is a revolving account.
A disadvantage of a loan against gold is, in case you default at repayment continuously, the gold will be kept with the financial institution, and not returned, so as to recover the outstanding payment. In a LOC, no assets are put at stake, but the bank can take steps to recover the outstanding amount in other specified ways.
Why Opt for a Loan against Gold than a Line of Credit?
A benefit of a line of credit is, you can borrow only a required amount and not pay interest on a large loan. However, there are certain disadvantages it has when compared to a gold loan.
- Being an unsecured loan, the rate of interest is higher than a secured loan such as a loan against gold. A gold loan interest rate can be as low as 10.50%, while the same for LOC can extend up to 36%, in a year.
- An open line of credit can tempt you to overspend, adding to the financial woes, while if you take a loan on gold, it is possible to only utilize the loan amount disbursed.
- Sometimes, LOCs can be taken for only a specific purpose, like business, property purchase, and more. In a loan against gold, you are free to utilize the amount for any personal expenses, even for business and agriculture needs.
- Interest rates (APRs) on LOCs are variable, while the same for loans against gold are fixed.
- As against a jewel loan, a LOC has heavier penalty on a late payment. If you exceed the credit limit, the penalties attached are again more than a loan on gold.
- Misuse of a line of credit can hamper your credit score. When it comes to a gold loan, credit score is only affected if you default at the loan.
Which is Best: LOC or a Loan Against Gold?
Both the forms of borrowing, a jewel loan and a line of credit, have their own pros and cons. If you wish to opt for an affordable form of credit, then the former is the ideal option, as it is possible to save on the interest paid. Gold is also an asset, which almost every person owns today, thus it is a ready-means of securing credit without having to depend on unsecured loans. So, if you own 18-24 carat gold of equivalent weight to fetch anywhere between Rs. 50,000 and Rs. 50 lakhs, after maintaining a margin of 25%, then you can get the required funds, in a matter of 45 minutes to 2 hours.
Just like how you can avail LOC online, you access a gold loan on the internet. Most of the loan providers provide the facility of dropping a loan application on their official website or mobile application. Simply upload your KYC documents, visit the financial institution for gold valuation, and receive the funds in your bank account, in a jiffy.
Hence, a gold loan is a pocket-friendly, quick, hassle-free, and convenient option to obtain funds, when compare to a line of credit. But, it is finally a choice you have to make for yourself as to which borrowing option you want to avail. Go through the above-mentioned pointers to weigh your choices, and choose one, as per your suitability.