Beginner’s Guide to Gold Loan

Gold loans are loans granted in lieu of depositing gold with NBFCs or banks. The concept of pledging gold for money has been around for centuries. However, the entry of banks and other lending institutions in the domain has made it a more formal and transparent process vis-à-vis money lenders. According to recent reports, more than 18000 tonnes of gold is lying idle with Indians. To capitalize on this huge opportunity, banks and Non-Banking Finance Corporations (NBFCs) are aggressively promoting gold loans in India.

Gold loans are cheaper, especially for short-term credit seekers, compared to credit cards or personal loans. But, as with all loans, complete knowledge is necessary before entering into a financial agreement. Paisabazaar.com unravels the nitty-gritties associated with gold loan so that you make an informed choice whenever you go scouting for this loan.

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Important things to know about gold loans:

• Lenders offer loans up to 80% of the gold’s value after checking the metal for purity and ascertaining its value.
• Coins and bars with higher purity offer more value than gold jewellery (ornaments encrusted with precious stones are valued only for their gold component).
• The interest on loan can vary from 13%–16% per annum. It is usually repayable in 12–60 months in equal installments and includes interest and principal.
• Any person over the age of 18 and who has gold to be pledged can opt for such loans.

Benefits

• It is a secured loan. Therefore, even if you have a bad credit history, it won’t impact your chances of getting a loan.
• You have an option to pay only the interest component and the principle can be paid as a lump sum amount at the end of the loan tenure.
• For those of you involved in agriculture, gold loan can be availed at a reduced rate of interest which can be as low as 8%.
• Since your gold is the collateral, the paper work involved is bare minimum. All you require are your personal id and address proofs.

What happens when the price of gold fluctuates?

• Fluctuation in gold prices does not affect your loan or pledged gold in any way. Once you have taken a loan, you are not contractually bound to make up for the difference in the amount even if gold prices decrease so much that your loan value actually becomes higher.

What to watch out for:

• If there is a default in repayment, the finance company can sell the deposited gold and recover dues as per the terms of loan agreement.
• If that happens, not only will you lose your gold, but you will lose it by not realizing the full value of the gold because the Loan-to-Value ratio is a maximum of 75%.
• If you default on your loan, the lender will levy an additional penal interest charge on your loan amount.

Whom should you approach for taking a gold loan: a Bank or an NBFC?

As both banks and NBFCs offer gold loans, you may find it difficult whom to finally take the loan from. But before you make that decision, do check all the gold loan options available to you. Further, keep in mind the following points:

• Rate of interest: Banks have an advantage over NBFCs because the rate of interest charged by them is comparatively lower. This is so because banks are able to raise funds at lower rates than NBFCs.
• Repayment flexibility: Where gold loan from NBFC scores over a bank is the flexibility it gives you in order to repay your loan. An NBFC allows you to repay your principal in a lump sum at the end of the loan tenure while paying only the interest component monthly during the tenure.
• Loan disbursal time: The time taken to disburse the loan is very less. NBFCs take just 5mins for disbursal while banks can take up to 4 hours.
• Pre-Payment Penalty: In most cases, NBFCs do not charge pre-payment penalty. However, banks do charge a penalty on pre-payment of the loan.

We hope this ready-reckoner has helped clear the air surrounding gold loans. Happy loan hunting!