Why is a gold loan better than an overdraft on FD?

There are a range of loans offered by banks, NBFCs, and other financial service providers to suit different needs. However, loan categories are divided into secured and unsecured loans. As the name suggests, a secured loan requires the borrower to pledge the property or security of the borrowed money. Unsecured loans, on the other hand, are not secured by collateral. Both money lending and overdrafts on term deposits fall within the category of secured lending. But why are gold loans better than overdrafts to FDs?

under gold loan, a borrower pledges an item of gold as collateral to borrow money from a financial service provider. This type of loan is especially useful in case of emergency. Banks receive gold as collateral for a specific period of time, which is the holding period of the loan. Interest is taxed on the borrower and must be paid in the form of: EMIOnce the borrower has paid off the loan in full, the bank will return the gold physical asset. However, physical gold is generally pledged between 18 and 22 carats.

Earlier in August this year, the RBI eased the lending ratio for gold loans to 90% from the previous 75%.

When it comes to overdrafts against fixed deposits, this type of loan is considered a prominent type of investment as both short and long term funding requirements can be chosen. FDs are typically used as security for taking out loans for various reasons, such as educational purposes or product purchases.

Banks usually offer 90% overdraft on the FD value. Some of the advantages of overdraft over FD are: Even if you have a low credit score, you can still get a loan even if you don’t meet the income eligibility criteria because your FD is held as collateral. The interest rates you need to repay on these loans are low, 1-2% higher than the interest rates offered on FDs. The FD amount can also be used to settle loans and reduce EMI.

Which is better, a gold loan or an overdraft for FD?

According to Umesh Mohanan, director and CEO of Indel money, gold loans are valued over other secured loan options, including overdrafts to FDs, primarily due to their easy availability. Gold loans come with easy documentation, fast payouts, and flexible tenure. Tax incentives for gold loans are available if the funds are used to build or purchase a home, renovate a home or finance business expenses.

Meanwhile, Nidhi Manchanda, a certified financial planner and head of training, research and development at Fintoo, explained that gold loans are of great value in an emergency as the process is fast and requires few documents. I’m here. Since this is a secured loan, a lower CIBIL score will not limit you from getting faster approval. In fact, paying your EMI in a timely fashion can improve your credit score.

Manchanda further states that if a loan for gold is taken for the purpose of renovating, building or purchasing a home, a tax credit of up to 1.5 lacs on the principal is available under Section 80C of the Income Tax Act of 1961. I am emphasizing. pay back debt. You can also claim a tax credit of up to Rs. Interest of Rs 2,000,000 paid per annum to him for the construction or purchase of residential property under Section 24 of the Income Tax Act, 1961. Please note that money loans for personal use are not eligible for tax benefits.

Disclaimer: The views and recommendations above are those of the individual analyst or brokerage firm and not those of Mint.

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