How to Fulfil Your Fund Requirements with the Help of a Gold Loan?

September 30, 2021 Mutual Fund

Gold is the most precious of all metals. In India, gold is considered as a symbol of Lakshmi, the goddess of wealth and prosperity. Hence, gold has a significant value in Indian religious ceremonies and weddings. Moreover, in the last couple of decades it has evolved from being a precious commodity used for jewellery to one of the most popular investment instruments.

Apart from that, gold has been helpful for people at the time of difficulties or during financial crisis for past many years. Do you remember watching the old Hindi movies where the heroes used to get back their mother’s precious jewellery back from the not-so-gentle goldsmith after so much of struggle? They used to pledge their gold to borrow funds during financial emergencies. A gold loan is nothing but a modern version of taking a loan, of course within the regulations as framed by the government.

What is a Gold 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 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, 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.

How does Gold Loan work?

The process of gold loan is relatively easy and quick. 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 an 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 and address proof, income documents, etc. Generally, lenders do not do the credit check for gold loan as the loan is backed by a security. However, some lenders prefer to do a soft credit check. The banks and NBFCs have their gold evaluators who evaluate the gold to check its purity. Based on that, the sanction amount is decided, and the loan gets sanctioned by the bank or NBFC.

One must check with the bank or NBFC about the type of gold they accept. For example, some lenders accept only gold jewellery, and not gold coins or bars, etc.

A borrower needs to repay the loan as per the gold loan agreement. Upon repayment of principal and interest, a borrower can get back the pledged gold.

Who can avail of Gold Loan?

There are no stringent eligibility criteria to avail of gold loan. However, you need to fulfil the below requirements:

• You must be an Indian resident. Generally, NRIs, minors, or corporations do not qualify for gold loans.

• You must provide identity and address proof as per the lender's policy.

• You must provide salary proof, such as salary slips, bank statements, ITR, etc.

What is the rate of interest on Gold Loans?

The rate of interest on gold loans is lower than unsecured loans, such as personal loans or business loans. The gold loan interest rate varies from lender to lender at the time of availing the loan. It typically ranges between 7% p.a. to 18% p.a. It is advisable to check and compare the interest rate of various lenders as usually, banks offer gold loans at lower rates of interest as compared to NBFCs.

What are the other charges of Gold Loans?

Apart from the interest amount, there are other charges, such as processing fees, prepayment charges, etc. You should be aware of all the details before availing of gold loans. Generally, the processing fee ranges between 0.50% to 2% of the loan amount. Some lenders charge a fixed amount of processing fee irrespective of the loan amount. If you wish to repay the loan before the agreed loan period, you might be charged with prepayment charges. In addition, if you wish to renew the gold loan after your loan tenure, you will be charged a renewal fee.

What is the tenure for a Gold Loan?

Depending on the requirement, a borrower can avail of a gold loan for 6 to 24 months. A gold loan is generally offered for a short period of time.

How much loan can you get?

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 Lakhs, you can get up to Rs 75,000 as a loan against gold. However, many banks and NBFCs have a cap on the maximum amount they can offer as a gold loan, which you must check before applying.

How can you apply for a Gold Loan?

Offline

• You may visit the nearest branch of bank or NBFC that offers gold loans and inquire about it to the customer service desk.

• The customer service officer will provide you with the details of the loan, such as its features, interest rate and other charges, etc.

• It is advisable to compare all these details with other banks and NBFCs before applying for a gold loan.

• If you wish to proceed, you may apply for the loan and get your gold evaluated by the lender's expert.

• You will be informed by the lender about the maximum loan amount you can avail.

• If you agree to the terms and submit the required documents, the lender will sanction the loan and transfer the funds in your bank account as soon as possible.

Online

• Applying for a gold loan through the online mode is very quick and easy. You can apply for it from the comfort of your home.

• Check with multiple banks and NBFCs that offer gold loans and inquire about the rate of interest, terms and conditions, etc. Again, this comparison can be conveniently checked online.

• Choose a lender that is most suitable for your requirements and apply online from their official website.

• If you are not sure of applying online, you may call, or request a call back from the bank or NBFC representatives, who will guide you throughout the process.

• Once you submit the required documents, the lender will arrange for an expert to evaluate your gold.

• You may either visit the nearest branch or request a doorstep evaluation.

Once all the formalities are done from the bank, and the agreement is signed by you, you will receive the loan amount in your bank account as soon as possible.

How to close the Gold Loan?

Different lenders offer different repayment methods. Some banks and NBFCs offer to pay only interest during the loan period and pay the principal at the end of the loan tenure. Whereas others allow you to pay interest plus principal through regular EMIs. It is advisable to know the repayment method in advance and choose the method that is convenient for you.

What are the benefits of availing of a Gold Loan?

1. You can take advantage of the gold lying in your bank locker to raise funds. You get the money when you require it without liquidating the asset.

2. The rate of interest is usually lower than any unsecured loan.

3. There is no restriction on the usage of the 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.

4. 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 avail of a new gold loan from another lender if they offer a better deal.

5. If you are in a financial crunch and are expecting funds in the near future, opting for a flexible repayment option can be very helpful. You have 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. Gold loan can be beneficial if you do not have a good credit score, which is a primary requirement for an unsecured loan. As the loan is backed up by gold, no credit score or credit history check is usually done by the banks.

7. The other charges, such as processing fees, prepayment charges, renewal charges, etc., are lower compared to unsecured loans.

8. Your jewellery stays safe with the bank or NBFC you borrowed from. So, you do not have to worry or spend extra amount for its security.

9. You can get up to 75% of the value of the gold you pledge, if the Loan To Value (LTV) ratio is high.

10. You may get back your jewellery securely and safely once you repay the loan amount to the bank or NBFC.

What are the disadvantages of availing of a Gold Loan?

1. 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. So, there is a risk of losing your assets in case of default.

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

3. Not paying the EMIs timely or defaulting on the loan can harm your credit score.

To Conclude:

A gold loan can be the best choice when you are in an emergency or need of small credit for a short span of time. It can save your money on interest and offers a flexible repayment option, making it more convenient for business people facing financial difficulties. However, it is advisable to avail of a gold loan only if you are good at financial discipline because you might have to lose your precious gold if you do not timely pay your EMIs or default on the loan repayment. Moreover, it is essential to do proper research, read the product features, terms and conditions carefully before applying for a gold loan.

This article first appeared on PersonalFN here