Why the lower rate is not always the cheaper loan
A gold loan is secured on your gold, so its quoted rate is often lower than the rate on an unsecured personal loan. But the rate is only half of the cost. How you repay matters as much. A personal loan is repaid in equal monthly instalments, so the amount you owe falls every month. A gold loan is often repaid in one payment at the end, or by paying only interest until the end, so you owe the whole amount for the whole term.
That is why the calculator works out each loan's total cost and its effective annual rate from the cash you actually receive and the payments you make, including any fee taken from the loan. The effective annual rate is the one number that puts a single-payment loan and an instalment loan on the same footing.
Worked example
Borrow ₹5,00,000 for 12 months. A gold loan at 12% a year, repaid in one payment at the end, costs ₹60,000.00 in interest. A personal loan at 14% repaid in equal monthly instalments costs ₹38,722.71, with a payment of ₹44,893.56 a month. The personal loan costs ₹21,277.29 less in total, even though its rate is higher.
The effective annual rates tell the other side. The gold loan works out at 12.00% a year and the personal loan at 14.93%. For each rupee borrowed for a year the gold loan is cheaper, but you hold the whole amount for the whole year, while the personal loan is repaid as you go, so you owe less on average and pay less in total. Which matters to you depends on whether you need the whole amount for the whole term.
If the same gold loan were repaid in equal monthly instalments, the payment would be ₹44,424.39 a month, the interest ₹33,092.73 and the gold loan would cost ₹5,629.97 less in total. A 1% fee on the single-payment gold loan lifts its effective annual rate to 13.13%.
To look at a single-payment gold loan on its own, use the bullet repayment gold loan calculator.
What the comparison leaves out
The two loans also differ in ways a number does not show. A gold loan needs gold and little paperwork, and the lender can sell the gold if you do not repay. A personal loan usually asks for proof of income and a credit check, and missing payments can affect your credit record. Gold loan terms and limits are set by each lender and by Reserve Bank of India rules, which change.
The calculator uses the rate you enter and a fee taken from the amount you receive. It does not add taxes or insurance, so include them in the fee if your lender charges them.
For the interest on a gold loan alone, see the gold loan interest calculator.
Inputs for the gold loan vs personal loan calculator
Amount to borrow
The same amount for both loans, so the costs compare fairly.
Term
The months you take to repay, the same for both loans.
Gold loan interest rate
The rate on your gold loan quote. The rate shown is only an example, so enter your own.
Gold loan rate is quoted
Choose per year or per month to match your quote.
Gold loan is repaid
All at the end, interest monthly with the loan at the end, or in equal monthly instalments.
Gold loan fee
A processing fee as a percentage of the amount, taken from what you receive.
Personal loan interest rate (per year)
The yearly rate on your personal loan quote. The rate shown is only an example.
Personal loan fee
A processing fee as a percentage of the amount, taken from what you receive.
CALCULATOR QUESTIONS
Gold loan vs personal loan calculator questions
Is a gold loan cheaper than a personal loan?
Often the rate is lower, but not always the cost. If a gold loan is repaid in one payment at the end, you owe the whole amount for the whole term.
What is the effective annual rate?
The yearly rate that matches the cash you receive to all the payments you make, including fees. It lets you compare different repayment types.
Why can the gold loan cost more in total with a lower rate?
With a single payment you owe the whole amount for the whole term. A personal loan is repaid as you go, so you owe less on average and pay less in total.
Why does the repayment type matter?
Equal instalments reduce what you owe each month. A single payment or interest-only repayment keeps the full amount owing until the end.
Does this include processing fees?
Yes, as a percentage of the amount taken out of what you receive. Enter 0 if there is none.