Gold loan companies are soliciting customers by making lucrative offers, including quick and easy processing. This comes at a time when gold prices have been on an incessant rise. The yellow metal ended the previous week at Rs 30,995 per 10 grams, rising over 23 per cent during the calendar year.
Is this the right to avail gold loan? FeMoney spoke to personal finance advisor, Anil Rego, CEO & Founder, Right Horizons, to understand the pros and cons of considering going for a gold loan at this point. Here are his views:
Timing of availing gold loan:
Rises in prices of an asset should not be the only reason to avail loan. If an individual is genuinely looking to take a loan against his holdings in gold, then higher prices will benefit the borrower as the loan amount received would be higher too – however the absolute cost of borrowing will also be higher since the interest paid out will be more. Also it is advisable, to borrow money on one’s gold holdings as a last resort/option especially when the asset pledged is in form of jewellery.
Factors to keep in mind while going for a gold loan:
While going for a gold loan, a borrower should keep the following things in mind.
Tenure of the Loan: Usually gold loans are given for a short term period, usually maximum of 12 months. Thus, before taking a gold loan one should be confident, that he would be able to repay the loan within the specified time.
Loan amount disbursed: One of the important thing to note is that the entire value of the gold is not given as loan. The lender will also keep a certain margin of safety. Usually, the percentage of loan disbursed is higher in case of NBFCs.
Repayment Term: Some borrowers allow for regular payment in form of EMI, whereas some allow payment of principal at the end. Thus it is important to understand the terms of repayment, also if there are any charges on prepayment of loan
Advantages and disadvantages of gold loan:
Easy to Avail – It is easy to avail gold loans as compared to others, thus in case of financial emergencies it becomes an ideal option. Even the processing time on the gold loan is also less, thus making it an instant loan
Repayment Flexibility – Usually gold loan offers flexibility in repayment terms. A borrower can choose only to repay interest during the tenure of the loan and pay principal at the later stage
Higher Interest Rates – Initially the interest rates on gold loan were much lesser as compared to the rates on personal loan. However, with the falling gold prices, the interest rates charged on the loan has been increased.
Short Tenure and Low LTV – Gold loans have a maximum tenure of 1 yr., thus if you are opting for a gold loan make sure you can repay the same within the time frame. RBI has barred NBFC’s from giving loan with the Loan to Value ration of more than 75%. Thus if you pledge gold worth Rs. 1 Lac, then the maximum loan amount will be Rs 75,000.
Other loan options that could be considered:
If the amount required is for short term, then one can even consider taking a personal loan or even taking a loan from a friend or a relative. A loan from a friend or relative will always be helpful since in case of emergency there can be an extension in the repayment of the loan; also in some case a friend or a relative may not charge interest if the borrowed amount is less.