Should You Pledge Your Family Gold Often to Avail of a Loan?

November 20, 2021 Mutual Fund

In India, gold is considered as a symbol of Lakshmi, the goddess of wealth and prosperity. There is a sentimental value attached to it and hence, gold carries huge significance in Indian religious ceremonies, weddings and even festivals like Akshaya Tritiya, Dhanteras and Diwali. Moreover, in the last couple of decades, it has evolved from being a precious commodity used for jewellery to one of the popular investment instruments.

Due to its constantly increasing value, gold has been helpful for people at the time of difficulties or during the financial crisis for the past many years. When in need, we can sell our gold jewellery or pure gold bars/coins to get funds. Nowadays, we can easily pledge our family gold to borrow funds during financial emergencies. But, is it wise to pledge your family gold often to avail of a loan?

A gold loan is a type of secured loan that is offered by banks and Non-Banking Financial Companies (NBFCs) up to a certain percentage of the value of the gold you pledge. As the loan is backed by gold, there is no risk of default to the lender. Therefore, many banks and NBFCs are comfortable offering a gold loan at a reasonable rate of interest. Moreover, like any other loans there are no restrictions on the usage of the loan amount as long as the purpose is legitimate. So, the borrower can utilise it for his/her personal as well as business requirements.

Here are some of the advantages of availing of a gold loan during a financial crunch:

1. Quick and Easy Process:

The entire process of a gold loan is relatively easy and quick, you can get the fund immediately across the table. In this case, like any other secured loan, you have to pledge your assets i.e. the gold. The basic requirement is that you should hold 18 carats and above quality gold in any form, such as jewellery, coins, etc. A borrower also needs to submit additional required documents, such as identity proof, address proof, income documents, etc. The banks and NBFCs have their gold evaluators who evaluate the gold to check its purity. Based on that, the sanctioned amount is decided, and the loan gets sanctioned by the bank or NBFC.

2. Lower Rate of Interest:

As a gold loan is a type of secured loan, the rate of interest is comparatively lower than unsecured loans. The gold loan interest rate varies from lender to lender depending on the purity of the gold and other factors at the time of availing the loan. Typically it ranges between 7% p.a. to 15% p.a. Therefore, it is advisable to check and compare the interest rate of various lenders. Generally banks offer gold loans at lower rate of interest as compared to NBFCs.

3. Lower Processing Fee:

Apart from the interest amount, like any other loan, the lender charges you a processing fee. Some lenders may charge a processing fee that ranges from 0.50% to 2% of the loan amount, which is comparatively lower than unsecured loans like a personal loan. However, there are many banks and NBFCs in India that do not charge any processing fee for the gold loan.

4. Maximum Loan Amount:

The Loan to Value (LTV) ratio of gold loans is high with most banks and NBFCs. A borrower can obtain up to 75% of the value of the gold as a loan amount. So, if your gold is worth Rs 1 Lakh, then you can get up to Rs 75,000 as a loan against gold. However, many lenders have a cap on the maximum amount they can offer as a gold loan, which you must check before applying.

5. Flexible Repayment:

If you are in a financial crunch and are expecting funds in the near future, then opting for a flexible repayment option offered by the lenders, can be very helpful. By opting for a flexible repayment option, you are required to pay only the interest during the loan period and the principal amount at the end of the loan tenure. Therefore, you do not have to pay the full EMI amount every month.

6. Multipurpose Loan:

There is no restriction on the usage of the gold loan amount. You can use it for personal purposes, such as a child’s education, wedding, etc. or business purposes, such as capital to start a new business, business expansion, etc. Whereas, most secured loans have a restriction on the end-use of the loan. For example, you can use your car loan only to purchase a car.

7. No Need to Liquidate Gold:

You can take advantage of the gold lying in your locker to raise funds. You get the money when you require it without selling the gold. Like any secured loan, your asset is returned to you once you repay the loan. So, you do not have to worry about selling your family gold in times of need for money.

8. You Can Pledge Again:

There is no limit on how many times you pledge the same gold. So, once the loan tenure is over, you have an option to renew it. You can also avail of a new gold loan from another lender if they offer a better deal. However, you cannot pledge the same gold with multiple lenders at the same time.

9. No Credit Check:

A good credit score and credit history are the primary requirements for an unsecured loan. If you do not have a good credit score or never availed of any loan to have a good credit history, the gold loan is one of the best loan options for you. As the gold loan is backed up by gold, most lenders do not check a credit score or credit history. However, some lenders perform only a soft credit check.

10. Gold Stays Secure:

Your jewellery stays safe with the bank or NBFC when you borrow from them. It is kept in a safety vault so, you do not have to worry or spend an extra amount for its security. You will get back your jewellery securely and safely once you repay the loan amount to the bank or NBFC. Thus, you get complete peace of mind.

Here are some of the disadvantages of availing of a Gold Loan:

1. You May Lose Your Family Gold:

The primary disadvantage of availing of a gold loan is that your lender holds a right to liquidate your precious jewellery. If you default on the loan repayment you may lose your gold if the lender decides to liquidate your gold. So, there is a risk of losing your assets in case of default.

2. You Might Have to Pay High Rate of Interest:

If you do not do the research properly, you might end up paying a high amount of interest which might trouble you later.

3. Your Credit Score Might Get Impacted:

Not paying the EMIs timely or defaulting on the loan will negatively impact your credit score.

To Conclude:

If you are in an emergency or in need of small credit for a short span of time, a gold loan can be the best choice for you. Therefore, a gold loan is advisable for business people facing financial difficulties as you can pledge the same gold multiple times to avail of a loan as and when required and make flexible repayment with a lower rate of interest. However, you should avail of a gold loan frequently only if you are financially disciplined and are sure of your repayment capacity. Remember that not paying the EMIs before the due date or defaulting on the loan repayment will negatively impact your credit score. Furthermore, the lender holds the right to sell your asset to recover the dues, which means you might have to lose your precious family gold if you fail to make the repayment on time.Moreover, it is essential to do proper research, so read the product features, terms and conditions carefully before applying for a gold loan.

This article first appeared on PersonalFN here