Gold loan is the loan that one can get against the gold that one owns. Gold can be in the form of ornaments as well as pure gold assets. There are many banks and non-banking financial companies (NBFCs) authorised by RBI to offer gold loan at attractive rates. All major banks and NFBCs offer loan against gold.
Indian families normally have gold jewellery assets and thus loan against the same is a reliable method to generate money in times of need. The lender keeps the gold as collateral/pledge by the customer against the sanctioned loan. Once the borrower has been able to pay the loan amount, the gold is returned, and only the interest is charged. Thus, it is a method to generate liquidity immediately by mortgaging one’s gold assets for the period of loan duration.
Procedure
Applying for gold loan is a relatively simple and short process. Any person above the age of 21 is eligible to apply for a gold loan. The borrower needs to visit an office/ branch of the financial institution with the gold and some simple documents as proofs. Before validating the documents, the lender first completes all checks pertaining to the gold asset or jewellery being deposited. It checks the authenticity, weight and then computes the valuation of the gold. loans can be sanctioned up to 80% of the calculated value. The weight of any stone studded in the ornament is usually deducted before the valuation.
Approval of loans against gold is usually done very quickly, almost immediately. There is usually no need to have a guarantor or introducer needed for gold loans. Also, the credit history of the borrower is not checked. The process is simple, safe, and quick.
Documents
The documents needs are simple. One needs to submit the following:
- Identity proof (ration card, driving license, Aadhar card, PAN card etc.)
- Address proof (Passport, voter id, phone bill etc.)
- Signature proof (driving license, passport etc.)
- 2 passport sized photographs
Types of loans and applicable interest
Gold loans can vary depending upon the duration of the loan. The range of high to low Loan to Value (LTV) options vary from lender to lender.
- Generally, a high LTV offers the maximum loan for each gram of gold. The risk is higher and hence the interest rates are higher in this case. Also, the duration of this loan is usually shorter e.g. maximum of 3 months.
- On the other hand, a low LTV offers lower interests and longer duration to repay, but the lower risk also means that the loan amount per gram of gold is lesser.
Charges
There are very little processing charges involved in a gold loan as it is a secure loan against submitted security. Also, the repayment is quite flexible as the borrower is free to return the money in parts during the loan tenure, or the entire amount before or at the end of the term. There are no prepayment penalties levied.
In case the loan is not repaid till the tenure of the loan, a penal rate of interest is charged from the due date. But if the borrower fails to comply, the lender might auction the gold in order to recover its money. However, this is done as a last measure, when the intention of repayment seems near impossible.
Impact of gold price fluctuation
At the time of applying for a gold loan, gold rates play a key role in the sense that they help lenders ascertain how much amount to lend. Based on the prevailing gold rate, your loan amount can vary significantly. For instance, loan amount for gold pledged at a rate of Rs 28,800 will be lower than that pledged at a rate of Rs 33,300.
Merits
- Gold loan is a quick way to generate cash in case of emergency as the disbursal time is less than a day.
- You can get the loan even if you have a low credit score.
- The paperwork is relatively simple in case of gold loan as compared to other unsecured loans. Only a few simple documents are required to prove your identity and address proof.
- The borrower has the flexibility to pay the loan back as per convenience during the entire tenure of the loan. Despite there being a fixed EMI, you can pay more if you have extra cash.
- You can close your loan early without worrying about early repayment charges.
- Rural variants such as agricultural loans against the gold have an even lower interest rate, as promoted by RBI, however proof of agricultural documents will be additionally required in this case.
Demerits
- The loan amount depends upon the valuation of the gold, which can vary from lender to lender.
- In case of forfeit and auction due to non-repayment, the borrower tends to lose all value of any precious stones studded in the ornament, as their weight had been deducted from the valuation originally.
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