While the likes of Muthoot and Mannapuram have been carrying on the gold loan business in India for a long time, it is only in recent years that most of the banks have also actively started participating in giving gold loans. A gold loan is a loan against the physical pledge of gold. This can either be in the form of gold bars or in the form of gold ornaments. There is a complete assessment done by the bank / financier before the loan is given against the gold. Here are some important things to know about gold loans and you must also know the interest rate that is charged on gold loans.
Gold loans are one of the quickest and simplest ways to monetize your gold and get money. This loan can be applied by anyone who owns gold either in the form of jewellery or as gold coins or bars. Apart from banks and your local jewellers, there are many NBFCs which also specialize in giving gold loans to retail customers. In fact, many banks are also using NBFC as their last mile link for giving gold loans in rural and semi urban areas.
Key aspects you should know about a gold loan before availing the same
Know how much of loan can you get. That will depend on the value of the gold. The bank or financer will consider the equivalent of 22 carat gold. So if your gold is of lower carat then proportionately the quantity will be reduced. Normally banks will give you loan to the extent of 70% of the market value of the assessed quantity of the gold. Gold loans do not insist on any income documents except your basic PAN card and Aadhar card. What is the price considered? It varies. Some consider the daily price of gold while some consider the weekly or fortnightly average gold price to get a clearer picture. The loan is secured by the gold which is physically pledged to a bank.
You must bargain for the best interest rates. Normally, the rate of interest on Gold loans is comparatively lesser than Personal loans since gold loans are secured while personal loans are unsecured. Normally, NBFCs charge a higher rate of interest compared to banks as they have a higher cost of funds. Ideally, if you have an existing relationship with a bank, you can avail gold from the same bank as you can get better terms. The rate of interest varies between 13-15% in most cases. Don’t pledge gold with jewellers as they may not be very trustworthy.
Gold loans are a short term facility, normally for a period of up to 12 months. It has to be repaid after that period. You can approach your bank to extend the period of the loan for another 1 year based on mutually agreeable terms and conditions. Make sure that you are in a position to repay the loan within the time limit. Gold loans are good in case of emergencies but there is a major downside. In case you are not able to pay back on time then your gold will be auctioned and normally you end up getting an unfavourable rate for your gold in these circumstances.
Does credibility of the lender matter? It does because you are keeping your gold there. The lender will feel secure as he has the gold as security in case if the borrower does not pay back. However, the value of your gold is higher than the loan value and you don’t have any guarantee that you will get the gold back. Before you approach a lender do background checks and know the safety measures taken by the lender to safeguard your assets when applying for a gold loan. Ultimately the gold that you pledge should be in safe hands. So choose a reputed bank regulated by the RBI where you can actually rest assured.
Last, but not the least, clearly understand the repayment structure of the gold loan. There are various options. Gold loans normally have flexible repayment structure as compared to any other loans. In every bank, the repayment structure of gold loans might differ. In most banks, you can opt for paying just the interest amount through the period and at the end of the tenure, you can pay the principal amount and take back your gold. This is the preferred model. But some banks also insist that you pay part of your principal each month. This may work out to be more expensive for you. So, it’s important to understand the terms carefully before availing the gold loan. Above all, if you do not repay on time, the bank is entitled to auction the gold after giving due notice. Be cautious of that.