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A gold loan is a secured loan where the borrower keeps the gold with a bank or financial institution and avails money against it. A gold loan is similar to a mortgage loan where the owner keeps their house or any asset as a mortgage with the bank to take a loan against it.
A loan against gold serves as a source of instant supply when a person needs capital immediately. A person applying for a gold loan should know all the pros and cons associated with this type of loan.
Who Should Opt For Gold Loan?
1.People With Short-term Fund Requirement
Gold loans serve to fulfill short-term requirements for funds, and it is used as a common working capital loan in business. The gold loan is preferred against a personal loan from a gold loan bank with negative interest rates on a comparative basis.
2.People With Low Credit Score
A piece of jewellery acts as collateral against the loan taken from the bank. People with low credit scores opt for loans against gold because the bank is comfortable advancing loans to the people with low credit scores.
3.People Who Have Gold But Are Taking Personal Loan
People often go for personal loans even when they have gold lying ideals in their lockers. Instead of considering a personal loan with a short time duration, they should prefer a gold loan, and taking up a gold loan shall save the interest cost.
4.People Opting For Loan Against Gold From Unorganised Sector
It is seen that people prefer taking a gold loan from the unorganized sector in fear of rejection from organized financial institutions. They feel that the financial institutions and gold loan banks might not provide them with loans because of their poor credit score history. In such scenarios, these people pay costly interest, which ranges between 25% to 50% per annum. But this may not be a great idea.
Advantages Of Taking A Gold Loan
Gold loans are handy and can be sourced in a hassle-free way. A loan is available against gold in the form of jewellery. Some of the main benefits of a loan against gold are as follows:
1.Quick Processing
Physical gold is considered collateral in any gold loan company or financial institution. It becomes easy for the banks to provide loans in such a scenario. Lending against gold is a safer option for the lender as they can sell the gold if the borrower fails to repay. The processing time taken is minimal and adds to the borrower's convenience.
2.Lower Rate Of Interest
Gold loans are a form of secured loans. The bank charges a lower interest rate compared to other unsecured loans such as personal loans. The interest rates range around 12% to 14% per annum.
3.No Impact Of Poor Credit History
Financial institutions grant a loan to borrowers based on their repayment capability and credit score history. It is not case with a gold loan where gold jewellery is used as collateral to secure the loan. While providing gold loans, the lenders are assured about repayment of the principal amount. They do not have to depend on the borrower's credit history score before providing the loan.
4.Security Of Physical Gold
The lender who provides the loan has the responsibility of safely maintaining the physical gold of the borrower. The physical gold is kept safe in the bank's vault, and therefore the borrower does not have to worry regarding its security. Once the borrower repays the loan, the gold is returned.
5.Pay Interest Only Option
The gold loans come with option to pay only the interest until the maturity. In this feature, the borrower only pays the interest amount monthly. The principal amount can be paid back by the borrowers once they settle the outstanding in the loan account.
6.Zero Processing Fees
A few NBFCs like Manappuram Finance Ltd. do not charge any processing fees from the people applying for gold loans and nor do they levy prepayment charges. Since the gold loan is kept as a mortgage, the borrowers get the loan amount instantly. Some banks offering gold loan levy minimal prepayment charges of 1% on gold loans.
Features Of A Gold Loan
1.Interest Rate
The rate of interest on gold loans varies and depends on the financial institution and the scheme. The interest rate on gold loans provided by banks and financial institutions ranges from 8% to 18% per annum in the public sector, and these interest rates can go up to 25% per annum in the private sector.
2.Loan To Value Ratio
The guidelines of RBI state that a bank can provide a maximum of 75% of the value of gold as a loan amount. The actual loan to value ratio ranges between 60% to 70%, which implies that the banks keep a margin of 30% to 40%, making it safest for the gold loan companies.
3.Tenure
Gold loan is short to medium-term loan. The tenure of a gold loan starts from about six months to 24 months, and it is not a long-term loan that the borrowers can take.
4.Availability Of Loan
Gold is used as collateral against the capital. While providing gold loans, the lenders are assured about repayment of the principal amount. They do not have to depend on the borrower's credit history score before providing the loan. The gold loan banks are confident of sanctioning a loan even to those with a low credit score.
5.The Weight Of Stones And Their Value Is Not Counted
Precious stones and jewellery have a high value in the market. But, while calculating the LTV for a gold loan, the lenders do not consider these precious stones. The value of gold alone is considered for the calculation of the loan.
The Bottom Line
A gold loan is considered amongst banks' profitable loans as it is free from worries about non-performing assets. Since jewellery and gold are taken as collateral with the gold loan companies, the lenders can sell off the gold if the borrower fails to repay the monthly instalments or the principal component.
The concept of a gold loan should be understood properly to handle future necessities. With new variants coming up in the market each day, the borrowers should opt for gold loans as they effectively reduce the overall interest burden on the loan. The borrower should be aware of their repayment tenure as defaulting on loans can adversely affect the credit score.
It can also lead to difficulties with any future loan application. Gold loan is the easiest and the fastest way to access funds in case of any medical emergencies or any other unforeseen circumstances. The access to gold loans increases every day with the growing popularity and need for capital investments