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5 things you must know before applying for a gold loan

Uncertainties like the Covid-19 pandemic and other emergencies make us realise the importance of gold and how it can help you address your liquidity problems.

5 things you must know before applying for a gold loan
It is good to compare the interest rates of different institutions and choose the tenure to repay your loan easily without delay and default.

Gold is not just an ornament for decoration but one of the important financial assets against uncertainty and inflation. It helps secure a hassle-free loan. You can use your gold as collateral to break the borrowing barriers owing to your income or poor credit score. In India, gold is a popular asset class among households as it exchanges hands during several traditional ceremonies across the country. However, uncertainties like the Covid-19 pandemic and other emergencies make us realise the importance of gold and how it can help you address your liquidity problems.

You can mortgage your gold to financial institutions whenever you urgently need money. It helps you borrow money and reclaim your asset by paying back the loan. The Reserve Bank of India (RBI) had to increase the LTV ratio on gold loans to 90% from 75% until April 1, 2021, to help people get a higher value on their gold if they apply for gold loans in case of financial difficulties. 

Adhil Shetty, CEO, Bankbazaar, explains, “When gold prices rise, gold loans become a viable option for people looking for liquidity. If the gold prices fall, the borrower must pledge more gold or arrange for the shortfall. If a borrower defaults his loan, the lender can sell the pledged gold to recover the shortfall.”

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If you are also planning to apply for a gold loan, here is what you must know and do.

Choose Your Lender Carefully

It is important to check multiple institutions and compare their services and safety to ensure your gold remains safe till you reclaim the same. Also, how easily your loan gets approved and other services you may require during your loan tenure are important factors to consider before you finalise your lender.

Gold Loan Amount

The loan-to-value (LTV) ratio is capped at 75% by the RBI. Apart from the LTV ratio, your loan amount depends on the purity and valuation of your gold; if your gold purity is good, the chance of getting a higher amount of loan increases.  

The Loan Tenure

The tenure of the gold loan is typically lower than other types of loans. It is for a short duration, usually from a year to 36 months.

Also Read: Who clears a dead man’s loans?

Interest Rate

Though it varies from lender to lender, the interest on the gold loan may range between 7.40% and 14.50%. It may be higher or lower depending upon your gold purity, and other requirements lenders may have.

Repayment Clauses and Other Charges

Terms and conditions for gold loans are often different from one lender to another. Some lenders may accept the equated monthly instalment (EMI) like a regular loan, and others may ask you to pay the interest upfront and principal later. Many lenders also allow you to pay both interest and principal amounts together. It is good to know well in advance about prepayment charges, processing and other additional costs you may be liable to pay before you sign the loan agreement. 

These tips will help you take a wise decision when you opt for a gold loan. It is good to compare the interest rates of different institutions and choose the tenure to repay your loan easily without delay and default.

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