Gold – the name itself comes with a huge social and financial significance in India. A trusted investment instrument with a deep emotional value, the yellow metal has always been an integral part of our socio-economic fabric as well as key investment decisions. Hence, buying gold in the form of jewellery and coins is intrinsic to celebrating festive occasions, weddings and personal moments.
Gold, one of the most liquid assets, scores over other investment avenues because of its better return on investment. It offers a sense of financial security during emergencies and immediate fund requirements, as it can be monetized or pledged to arrange money. Be it for child’s education, home renovation, funding businesses or any medical emergency, one can reach out to the idly lying jewellery to apply for a gold loan to promptly meet urgent financial needs.
There are a few inherent benefits which make gold loan a popular option to meet urgent financial needs. First of all, availing a gold loan is convenient. The documentation requirements are minimal and repayment options are flexible. Moreover, interest rates on gold loans are relatively lower than those related to unsecured loans such as personal loans. Typically, there is no pre-payment on gold loans. However, a few lenders may charge up to 1 per cent of the remaining amount as a prepayment charge.
During the pandemic and post pandemic times, gold loan has emerged as a viable option to avail credit for personal and business needs. Banks, non-banking financial companies (NBFCs) and gold loan NBFCs are presently offering a number for gold loan schemes. Gold loan seekers need to keep a few things in mind to maximize the loan amount and ensure that the asset remains protected.
Borrowing from an NBFC or a bank: Several informal lenders from the unorganized gold loan segment offer “easy” gold loans at attractive interest rates. However, it is often advisable to opt for a bank or a non-banking financial company (NBFC) to avail a gold loan as they are considered a safe option. It is essential to understand that a gold loan is a secured loan, i.e., you must deposit your asset (jewellery or any physical form of gold) with the lender. Even among the bank or NBFC, look for the individual rate of interest, eligibility, and amount on offer. In most cases, gold loan NBFCs have a lower rate of interest or lower processing fees than those of banks.
Valuation of Gold: The gold loan amount sanctioned depends on the valuation of your asset. If you are borrowing against gold jewellery, the lender will consider only the actual gold price and not the additional stones and design of the jewellery. Also, having a pure quality of gold will fetch you a higher valuation and subsequently a higher loan amount. Generally, lenders accept only 18 carats or 24 carats of gold for extending a loan. Also, you need to check the loan-to-value (LTV) ratio offered by the lender. It can range from 60 per cent to 90 per cent. No lender provides you with 100% of the loan to value. Thus, for instance, if the LTV is 75 per cent and the gold deposited is valued at Rs 1,00,000, the loan amount will be Rs 75,000.
Interest Rate Comparison: Lenders decide the interest rate of the gold loan based on your risk profile. The rates may range from 7 per cent to 25 per cent, depending on your risk assessment. There are other factors such as loan amount, repayment tenure, LTV etc., which contribute to determining the interest rate. To get the best possible deal, you should compare interest rates offered by multiple lenders. Additionally, check other charges such as processing fees, etc.
Repayment Options: Another vital factor to consider while purchasing a gold loan is the repayment option. Lenders provide a considerable range of repayment options, including equated monthly instalments (EMI). Or you may choose only to pay interest during the loan tenure and pay the principal amount at one go.
Repayment Schedule: Gold loans generally have a short-term repayment schedule ranging from a week to a couple of years. While taking a gold loan, choose a repayment option with which you are most comfortable. Consider your general expenses and other cash flows while choosing a tenure.
Non-payment: One of the most critical factors to keep in mind before purchasing any gold loan is what happens in case you are not able to pay the dues on time. In such cases, the lender can auction your gold. Additionally, in case the price of gold drops due to market conditions, the lender may ask you to deposit additional gold to match the LTV ratio issued at the time of disbursement.
Gold loans are suitable when you experience a temporary cash crunch or immediate personal or business finance needs. Gold loans should not be availed to fund high-value expenses like purchasing a property.
(By Umesh Mohanan, Executive Director & CEO, Indel Money)