4 Important Things to Keep in Mind While Applying for a Gold Loan

February 7, 2022 Mutual Fund

Gold has always been one of the most popular investment avenues in India. Due to its constantly increasing value, gold has been helpful for people in times of difficulties or during a financial crisis for the past many years. Nowadays, with several banks and Non-Banking Financial Institutions (NBFCs) offering Gold Loan at attractive interest rates and minimum documentation, we can easily pledge our gold to avail of a Gold Loan. Although availing of a Gold Loan is a quick and easy way to borrow funds, there are certain things you should know before taking the Gold Loan that will ensure you get maximum benefits from it. This article elucidates all the important things you should keep in mind while applying for a Gold Loan.

Here are 4 important things to keep in mind while applying for a Gold Loan:

1. The loan amount is determined by the gold value:

Several banks and NBFCs provide gold loans, but the loan amount differs from lender to lender. The value of the loan determines the final loan amount. The higher the purity of the gold, the more the gold loan amount you are likely to receive. The banks and NBFCs have their gold evaluators who evaluate the gold to check its purity, based on which the sanctioned amount is decided. A borrower can obtain 75% to 90% of the value of the gold as a loan amount, depending on the lender and the Loan to Value (LTV) ratio. So, if your gold is worth Rs 1 lakh, you can receive up to Rs 75,000 to Rs 90,000 loan amount. Many banks have a maximum cap on the gold loan amount they can offer; hence you should check it before applying. Moreover, it is a basic requirement that the gold you are pledging is 18 carats and above quality gold in any form, such as jewellery, coins, etc.

2. The Credibility of the lender:

As there are numerous banks and NBFCs that offer gold loans, choosing the right lender can be a daunting task. Before applying for a gold loan, you should ensure it is a credible lender as you will be pledging your precious jewellery with them. You should check the customer reviews and safety measures taken by the lender for the security of the pledged gold. Many jewellers and unauthorised lenders also offer gold loans at slightly better offers, but it is advisable to avoid taking loans from such unauthorised lenders. There are many incidents of fraud with such unauthorised lenders, where the borrowers did not receive the pledged gold even after making the full repayment.

3. Rate of interest:

The rate of interest is a crucial factor while applying for a gold loan as it determines your repayment amount. Since it is a secured loan, the rate of interest is comparatively lower than unsecured loans like personal loan. The rate of interest of a gold loan varies from lender to lender depending on the purity of the gold and other factors at the time of availing the loan. It typically ranges from 7% p.a. to 15% p.a. Therefore, it is advisable to check the rates of interest of various lenders. Generally, banks offer a lower rate of interest compared to the NBFCs. However, most banks charge a processing fee of 1% to 2% of the loan amount, which most NBFCs do not. Hence, you should check the total cost of the loan by comparing a few lenders and then make an informed decision.

4. Repayment Methods:

Most people often ignore this important factor while applying for a gold loan. Most banks and NBFCs offer flexible repayment options for a gold loan. You should choose the loan repayment method based on your needs and financial situation. Here are some of the most convenient repayment methods you should consider:

• Bullet Repayment:

  Bullet repayment lets the borrower pay both the interest and the principal amount right at the end of the loan tenure. Although the interest is calculated every month, the payment becomes due at the end of the loan term. So, the borrower does not have to worry about paying the EMIs during the loan tenure as they are required to repay the entire amount at the end of the loan tenure in a single shot. The bullet repayment method is ideal for you if you are facing financial crisis and already have a huge EMI burden. However, you should remember that a large final payment of principal + interest eventually comes due.

• Pay Only Interest as EMI and Principal later:

  In this type of repayment method, a borrower can pay only the interest due on loan as per the EMI schedule. A borrower can repay the principal amount as per their convenience by the end of a loan term. So, a borrower can repay the due interest amount every month without having to worry about the principal amount and repay the entire principal amount at the end of the loan tenure. This is an ideal repayment method for you if you are in a financial crunch to pay huge EMIs but want to repay a certain amount as EMI to avoid paying a huge amount in a single shot.

• Overdraft Facility:

  The overdraft facility provides the borrower with a line of credit that can be utilised as per the borrower's requirement and lets them pay interest only on the utilised amount. For example, if you have availed of an overdraft facility of Rs 5 lakhs and utilised only Rs 2 lakhs out of it, you will have to pay interest only on the utilised amount, i.e. Rs 2 lakhs. This option is suitable for people in business who require funds from time to time for working capital and are unsure of the exact requirement.

• Regular EMIs:

  As the name suggests, in this type of repayment method, a borrower is required to repay the scheduled EMIs on a monthly basis.

To Conclude:

A gold loan is one of the best options available for short-term money requirements. With the many benefits that it offers, such as quick and easy process, lower rate of interest, flexible repayment methods, no restriction on the end-use of the loan amount, soft credit check, security of the gold, multiple times pledging of the same gold, etc., it makes a great choice for businessmen as well as salaried individuals. However, when pledging your precious gold, you should make sure you are able to repay the loan timely. Not being able to repay the gold loan on time can not only impact your credit score but also make you lose your precious gold as the lenders hold the right to sell the gold to recover the dues in case of a default in repayment. Furthermore, before applying for a gold loan, do proper research, choose the right lender, and read all the features, benefits, terms, and conditions to avoid dissatisfaction.

This article first appeared on PersonalFN here