Gold is bought on occasions such as Akshaya Tritiya, Dhanteras, marriage and even on birthdays. The metal can be a used as a source of funding for individuals. Giving loan against gold is an age-old business practised by money lenders and has now been institutionalised by banks and non-banking finance companies (NBFCs). One can deposit gold jewellery or gold coins with the bank or NBFCs and can avail a loan of up to 75% of value of the gold deposited. The process involves the usual lending norms such as proper documentory proof of identity, PAN card, address, etc.
Norms for gold loan
A bank is always comfortable in lending money against your ornaments. Time taken for disbursement is a few hours (some NBFCs claim that they disburse in few minutes). No guarantor is required and the interest charged is lower than that for personal loans. The loan amount depends on the value of the gold deposited and is not based on the repayment capacity of the borrower.
Sometimes, the borrower has to pay only the interest during the loan tenure and the principal can be paid back at the end of the loan period. This substantially reduces the burden on the borrower. Many banks do permit pre-payment of loans without any pre-payment penalty and other banks charges a nominal penalty of 1% of the outstanding.
Gold loan vs personal loan
Gold loan can be the best alternative to a personal loan. One can use the gold lying idle at home/locker in many ways. For instance, you can avail gold loan to pay off some high interest bearing loans such as your credit card outstandings. In case of medical emergency, one can avail gold loans. Gold ornaments can be pledged to avail overdraft and cash credit to meet working capital requirements in business.
Word of caution
If you fail to pay the loan within the tenure (normally one year) the bank can auction the gold and realize its dues. If you plan to avail the loan for more than one year, then it is a good idea to convert the loan into EMIs. One needs to take into account appraiser charges, processing fees, pre-payment penalty, etc.
Recently, the Reserve Bank of India reiterated that the loan-to-value (LTV) ratio for loan against jewellery should not exceed 75%. LTV ratio refers to the amount of loan you can get keeping gold as security. If price of gold falls, the borrower has to either make up for the fall in price by paying up that much or he has to bring in additional gold jewellery to match the fall in price.
Gold has a certain element of emotional value for all individuals and one should leverage it effectively.
The authors teach accounting and finance courses at IIM Shillong