Gold is considered a precious metal that is popularly used for various purposes such as industrial, commercial, and investment purposes.
A gold loan is a secured loan you can get by pledging gold or gold ornaments as collateral with a lender, i.e., a bank or NBFC. The lender would, in turn, give you a loan amount based on the market value of your gold. Once a gold loan is repaid along with interest, the gold is returned.
Unlike other secured loans, there are no restrictions on the end usage of the funds availed. As a result, it is a quick and easy way of fulfilling one’s financial needs. Be it a wedding, family vacation, or your child’s higher education.
Gold Loan Amount
Lenders evaluate the gold’s purity and weight before approving your loan application. Based on it, the market value of gold is determined based on the current rate. Most lenders offer loans of up to 75%-77% of the pledged gold’s market value. This is known as the ‘Loan to Value Ratio’ (LTV). The Reserve Bank of India has also set LTV at 75%, at which all the lenders need to lend. For example, if your gold’s value is Rs 1 lakh, the gold loan amount would be around Rs. 75,000. Besides the Loan to value ratio, the loan amount also depends on various other factors such as tenure and the borrower’s repayment capacity.
Features of Gold Loan
- Loan Tenure: A gold loan is a short-term loan with a flexible tenure ranging from a minimum of 1 month to 20 years, depending on the lender.
- Interest Rates on Gold Loan: Interest rates for a gold loan vary from lender to lender and range from 9% to 24%. In addition, a nominal processing fee ranging from 1-3% of the loan amount is also charged by some lenders. Therefore, before taking a gold loan, it is always advised to check and compare the interest rate, processing fee, late payment charges, and pre-payment charges with the lender. Financial institutions and NBFCs offer gold loans at a lower rate of interest.
- Safety of Gold Loan: With an unlicensed bank or lesser-known NBFC, you could risk your gold jewelry being misplaced or swapped. Due to this reason, it is advised to apply for a gold loan from a reliable lender, such as a nationalized bank. Known and reputed lenders keep the gold in a vault, so a borrower should not worry about the safety of the gold. This gives peace of mind.
- Effect on Credit Score: Lenders will not consider your existing credit score when you apply for a gold loan. However, if you are above 18 years of age and have documents to prove your ownership of the gold, you can apply for a gold loan.
Foreclosure of a Gold Loan:
You can always foreclose the gold loan at any time. Most lenders do not levy foreclosure charges for gold loans, but a few may charge between 2-4% of the outstanding principal amount. You can always get in touch with the lender to know the procedure they follow to foreclose a gold loan.
Conclusion: Benefits of Getting a Loan Against Your Gold
Gold loans are becoming increasingly popular these days. With gold prices rising, many people are looking for ways to get some cash without selling their gold. There are many benefits to taking a gold loan out, but the most significant is that you can keep your gold and still have cash in your hands. Selling your gold can be challenging for many people, especially if you have sentimental value. So, instead of selling your gold, you can consider getting a gold loan to get the cash you need. It is also possible to use a paperless gold coin as collateral for the loan.
