Loans against gold are given as an alternative to gold deposited with banks or NBFCs. For hundreds of years, people have exchanged gold for cash. However, it has become a more formal and transparent process in comparison to money lenders when banks and other lending organizations entered the market. Banks and Non-Banking Finance Corporations (NBFCs) are aggressively promoting gold loans in India in order to take advantage of this significant opportunity.
What are gold loans?
A gold loan is one that is given by banks and other financial organizations in exchange for the borrower’s guarantee of gold. The gold can come in the form of jewelry, coins, ornaments, ETFs, and other things. These are typically short-term loans. The length of the payback period is flexible and might range from months to years. These are the best loans to take out for weddings or unforeseen expenses if you are sure of your ability to repay the loan quickly. You need to be aware of the following aspects of gold loans.
Important factors to know about gold loans
Short term
Loans against gold are designed for the short term. The majority offer a maximum two-year repayment option. The use of gold loans is not advised if you are unable to repay the loan in that time frame. This is a quick and simple approach to guarantee some liquidity, though, if you can.
Interest rate
The gold loan interest rate is lower than any personal loan you may take out. Compared to NBFCs, banks charge lower rates, with public sector banks having the lowest rates. You might be able to get a loan from your local jeweler, and the interest rates will be lower, but only if you know and trust the jeweler.
Repayment structure
The repayment plan for gold loans is incredibly flexible, with the majority of banks offering the EMI option and requiring you to pay the principal in order to receive your pledged gold back. However, in addition to the EMI with interest, some banks additionally demand partial principal payment.
Past default in payment
However, as a general rule, you should always repay the debt you have borrowed from any lender as soon as possible. Be prepared for the lender to combine your outstanding balance with your current loan amount if you haven’t done so already and go to the same institution for another gold loan. Expect to receive your gold only after paying off all outstanding debts.
Lender credibility
Although not a problem when working with reputable banks and financial organizations, be ready to do a comprehensive background check when applying for a gold loan from any other sort of lender. Gold requires the least amount of documentation to be used as collateral for a loan, and you should be most concerned about the lender’s security of the gold.
How does the gold loan work?
In lieu of depositing gold jewelry, coins, bars, etc. with the lender, gold loans are given. The loan amount can be up to 80% of the value of the gold items pledged. The loan amount varies from lender to lender, though, according to the internal bank policies. Anyone living in India who owns gold articles is eligible to apply for a gold loan.
When you deliver the gold item to the lender, an appraiser will inspect it to establish its quality and current market value. You can start the documentation process once you’ve agreed to the loan amount and any fees. Following acceptance, the loan amount will be transferred to your bank account, and the lender will hold onto the gold.
The payback process begins as soon as you receive the loan money. The entire loan amount must be returned along with the lender’s specified interest rate. Typically, a gold loan has a maximum repayment duration of two years. Some lenders, nevertheless, might provide you with a longer term.
Documents required
The least amount of paperwork (and effort) is perhaps required in India to apply for a gold loan. The necessary paperwork is:
- Two recent passport-sized photographs.
- ID proof.
- Address proof.
- In the case of an agricultural loan worth more than one lakh, proof of landholdings.
Eligibility
- The requirements for receiving a gold loan differ from bank to bank and institution to institution. The eligibility requirements for a gold loan are the most flexible when compared to those for other types of loans. Below are the basic eligibility requirements.
- Be a farmer, trader, professional who is salaried or self-employed, or a businessperson.
- Age: 18-75
- Possess evidence proving ownership of the gold being committed to the lender.
- Possess the legal records proving your identification and address. In the event of a farming loan, documentation of land ownership is also necessary.
It is always a better idea to visit one of the many websites that can help you determine the exact requirements for a particular bank or institute based on factors like your age, your profession, your salary, the amount of gold you own, and your wish to raise a loan on, the purity of your gold, etc. because the above is just a general list of eligibility criteria.
How do lenders determine the gold loan?
Lenders utilize a combination of elements to calculate the loan amount that will be approved on a gold pledge.
The amount of gold pledged
This is a basic criterion that lenders can use to determine the total value of the gold that has been given to them. They won’t grant a loan based entirely on the gold that was pledged. Usually, it represents between 75% and 90% of the value. However, the RBI has released recommendations that limit this ratio to just 60% in order to reduce risks and guarantee payment.
The purity of gold
This element is taken into consideration while setting the gold’s price. Most gold loan providers employ assayers to verify the metal’s purity, and rates are set accordingly.
Current price of gold
The majority of lenders use their own system to determine the price of gold. It might be the current gold price, the price from two weeks ago, or some other value in between. It is advantageous to be aware of how a specific lender determines the price per gram of gold in advance. Your total amount of gold will be determined using this value.
Conclusion
A gold loan is one of the best solutions to handle any financial unforeseen circumstances because it has so many benefits. The main drawback of a gold loan is that you must pledge your gold to the lender, which puts it at risk. Therefore, make sure the loan is closed properly and the repayments are made on schedule.
