Personal Loan vs. Gold Loan: Which is more beneficial if you need ₹5 lakh? Understand the full calculation..
Personal Loan vs. Gold Loan: We often face sudden financial needs. In such situations, personal loans and gold loans are key options. However, there are differences in their costs and terms. A personal loan is available without any collateral, whereas a gold loan requires pledging gold jewelry.
The question arises: if you need ₹5 lakh, should you opt for a personal loan or a gold loan? As of September 2026, SBI's personal loan interest rates range from 10% to 15%, while the effective interest rate for SBI's gold loan (with EMI repayment) is 9.95%. However, comparing them solely based on the starting interest rate does not provide the full picture.
Is a personal loan more expensive?
Although personal loan rates start at 10%, not every customer qualifies for this rate. When granting a personal loan, banks consider factors such as credit score, regular income, existing loans, and the customer's overall repayment capacity. Customers with a strong credit profile and stable income are more likely to secure a lower rate. Banks also frequently offer lower interest rates through pre-approved offers.
The scenario for gold loans is somewhat different. It is a secured loan because the gold is pledged with the bank; consequently, the risk for the bank is lower compared to a personal loan. For this reason, gold loan interest rates can often be lower than those for personal loans.
What is the difference for a ₹5 lakh loan?
For this comparison, let us assume an interest rate of 12% for the personal loan and 9.95% for the gold loan. This makes it easier to understand the actual difference between the two options.
Parameter Personal Loan Gold Loan
Loan Amount ₹5 lakh ₹5 lakh
Interest Rate 12% 9.95%
Tenure 3 years 3 years
EMI ₹16,607 ₹16,122
Total Interest Approx. ₹97,850 Approx. ₹80,387
The comparison clearly illustrates the difference. If a customer can secure a personal loan at 12% interest but has the option to take a gold loan at approximately 9.95%, they could save around ₹17,500 in interest over three years on a ₹5 lakh loan.
**EMI for a ₹5 lakh Personal Loan**
If a ₹5 lakh personal loan is taken for three years at an annual interest rate of 12%, the EMI would be approximately ₹16,607. The total repayment over 36 months would be around ₹5.98 lakh, with interest costs amounting to approximately ₹97,850.
It is important to note that the 12% rate is used here as an example for a personal loan; the actual rate may vary depending on the bank and your credit profile.
**EMI for a ₹5 lakh Gold Loan**
Now, consider a ₹5 lakh gold loan taken for three years at an effective interest rate of 9.95%. In this scenario, the EMI would be approximately ₹16,122. The total repayment over three years would be around ₹5.80 lakh, with total interest amounting to approximately ₹80,387.
This means that for the same tenure and loan amount, the gold loan EMI would be about ₹485 lower than that of a personal loan, resulting in an interest saving of approximately ₹17,500 over three years.
**Impact of Credit Profile on Personal Loans**
A personal loan is an unsecured loan, meaning the bank does not hold any collateral—such as gold, property, or other assets—against the loan. Consequently, the bank places significant importance on the customer's credit history and income.
Factors such as a good credit score, regular income, and low existing debt help determine the personal loan interest rate. Conversely, if there are multiple ongoing loans or the bank perceives the repayment capacity as weak, the interest rate may be higher, or obtaining the loan could prove difficult.
**Lower Interest Rates for Gold Loans, but Gold Must Be Pledged**
A gold loan is a secured loan. In this arrangement, the customer pledges gold jewelry as collateral with the bank or lending institution, providing the lender with security against the loan. This is why, in some cases, the interest rate on a gold loan can be lower than that of a personal loan. While the customer's credit profile remains a factor, the fact that the loan is backed by gold reduces the bank's risk.
However, there is another side to gold loans. If the customer fails to repay the loan on time and defaults, the pledged gold could be subject to recovery action. Therefore, it is not advisable to opt for a gold loan solely based on the lower interest rate.
Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.