All you need to know about gold loans
Did you know that you could use your gold to avail a loan in less than a day? Read on to know more.
Gold loans are secured loans where gold jewellery is used as collateral. You pledge your gold jewellery with the lender and get a loan. The loan amount is usually a percentage of the gold’s value. You can repay the loan through monthly instalments. After the repayment, you get back your gold jewellery. Nationalised banks, private banks, and other financial institutions offer these loans at affordable interest rates. Usually, borrowers use this loan to meet a sudden financial goal, such as a marriage or a child's education. Instead of selling the gold, many people prefer to opt for a loan.
You take your gold jewellery to a lender and ask to pledge it for a loan. The lender evaluates the gold and sanctions a loan after verifying the documents. Some gold loan lenders may also provide home assessment of your gold jewellery. The process is quick and usually takes a day.
For a gold loan, you need to submit your identity proof such as a driver's license, PAN, passport or Aadhaar card If you do not have a PAN card, you will be asked to submit Form 60. For address proof, you need to submit an electricity bill, ration card or telephone bill. You need to also submit a signature proof such as passport copy, driver's license or any other document.
In addition to that, you also have to provide a passport size photograph. Some lenders also ask for your income proof.
As gold loans are secured loans, the interest rates are comparatively lower than unsecured loans like personal loans. Non-banking Financial Companies (NBFCs) can charge higher rates than banks. So, it is advisable to compare various interest rates before getting a gold loan. This can be higher than a personal loan, which has an interest rate of 12.75% or more , though this varies between different providers.
When you apply for a loan, lenders ask for a processing fee of up to 1% of the loan amount. You may also be charged for documentation. There may be fees applicable for valuation of the gold. Lenders may also charge renewal fees based on the loan amount, and stamp duty as per state laws. You will also need to pay a penalty charge in case of late payments. Your lender may also charge you service tax (or GST) and prepayment/foreclosure fees based on when you decide to close the loan. The actual amount of charges varies from lender to lender. So, don’t forget to compare these too.
Anyone who owns gold jewellery can get a gold loan. This can be salaried professionals or even housewives and farmers.
Gold loan tenures are usually short and range from to 3-12 months . However, some lenders may offer you a longer tenure. Other lenders allow you to renew your loan and extend the tenure
Since the tenures are short, you must be sure of being able to pay the loan back on time. You may lose the pledged gold if you fail to repay it within the tenure or the lender may auction it off to recover the loan amount.
Lenders evaluate the gold purity and their weight before confirming the loan amount. Based on the gold's purity and its weight, the gold appraiser determines the market value. The lender offers to give a loan with a value up to 75% of the market value. This is called the ‘Loan to value ratio’ (LTV). For instance, if your gold's value is Rs 1 lakh, the loan amount granted cannot be higher than Rs. 75,000. However, some could get a lower loan amount too. This is because lenders often consider the borrower’s repayment capacity too. However, unlike personal loans, lenders do not take the credit score into consideration.
The way the gold jewellery is stored may vary from lender to lender, but great care is taken to store the gold jewellery properly. After the loan is granted and disbursed, the gold is kept under tight security. Lenders use electronic vaults with motion detectors and CCTVs for security purposes. Some lenders even insure the gold pledged by you. This protects it against theft. In case of a robbery, you still get an amount equivalent to the gold’s market value back.
Depending on your lender, you may have the option of flexible repayment. Most lenders offer you the choice of paying only the interest component every month. In such cases, the principal amount is paid at the end of the loan tenure. You can also choose to pay EMIs to pay off the loan.
Here are a few dos and don'ts when applying for a gold loan.
Dos: Compare rates and rules. Not all lenders offer the same product features. So, pick a lender who offers you the best rate and features. Or you could end up paying more interest.
Don’ts: Don’t compare just the loan amount or the EMI cost. Look at the other charges and clauses too. Compare the total cost of the loans and pick the best loan.
Dos: Check if the lender is credible. Since you are entrusting them with your gold, opt for reputed lenders. Do not take gold loans from lenders who have bad reviews.
Don’ts: Don’t forget to budget the gold loan EMI thoroughly. Do not default as you could lose your gold assets.
Dos: Consider the extra cost because of processing and other charges, especially if you opt for flexible repayment options. They could end up costing more.
Don’ts: Don’t apply for a higher loan amount than required; you could lose the asset if you can't repay the loan.
Usually, gold loans are comparatively cheaper than personal loans. If you have an immediate financial need, a gold loan can help you, as the process is quicker than most loans.
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