With the rise in gold prices, demand for gold loans is rising as small businesses are using the metal as collateral to borrow from a bank or a non-banking financial company (NBFC) to meet their short-term financial requirements. Financial institutions can lend up to 90% of the value of gold jewellery and ornaments.
Being a secured loan, the interest rate of a gold loan is lower than a personal loan.
Also Read: How fluctuations in gold prices could affect gold loans
Borrowing against gold is one of the popular instruments based on the physical pledge of the metal. Banks find it safe to lend against gold and customers find it convenient as the loans are disbursed faster with less documentation. The borrower has to prove ownership of gold being pledged and banks may even ask for a no-objection certificate from the lady of the house.
Also Read: How to capitalise on a gold loan opportunity
As the lender will not ask about end-use of the loan, there is a flexibility to use the loan for any type of expense. However, some banks may put restrictions on using the money for speculative purposes and stock trading.
What to check
A borrower must check the reputation of the lender, the interest rate and processing fee being charged. While most lenders do not levy pre-payment charges for gold loans provided at least three instalments have been paid, the borrower must check this with the bank/NBFC and also read the loan document carefully. The tenure of the gold loans are short, typically up to two years, as compared to most other loans. However, it is better to clear the loan early to reduce the interest burden. While gold loans are secured, go for an amount which you can repay quickly. Lenders offer a feature where borrowers can pay only the interest amount of the loan every month and repay the principal amount at the end of the tenure. However, borrowers must look at the terms and conditions of this feature.
The borrower will have to keep in mind that if gold prices fall in the future, he will have to pledge more gold ornaments to maintain the loan-to-value. The lenders track gold prices and consider the changes recorded in the past one month.