This is a loan where the customer pledges gold like jewelry, ornaments and bank-issued gold coins as collateral for availing a loan. The bank or the lender uses the gold as security against a potential payment default by the customer. The loan amount sanctioned is a certain percentage of the value of the gold, that has been pledged.
Gold loans are short-term loans and the repayment period ranges from one month to a few years. If you are in need of money for immediate expenses and expect to be able to pay it back in a short time, this type of loan might be a good option.
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Gold loan advertisements are everywhere. Gold as an asset has emotional value as it is largely in the form of family jewellery. Therefore, in times of need, an individual can pledge some gold to avail cash for necessary expenses. However, the financial institutes that are offering gold loans function as non-banking financial institutes, NBFCs or private banks. It is not clear as to how closely NBFCs are monitored by the RBI.
The companies have ambiguous financial models, based on which they operate. Listed below are some of the instances where a customer might feel cheated if he has availed a loan without knowing the details or the terms and conditions.
Interest rates charged: The company takes your gold and charges an interest of 2% a month which is an annual interest rate of 24% a year. An individual can opt for personal loans rather than gold loans as they have a lesser rate of interest or can be availed without any security. There is also a lock in period on gold loans.
The repayment structure: Gold loan repayment structure is slightly different from other loans. There are the options of Only Interest EMIs where the borrower can pay only interest in EMIs and repay the principal at maturity. There is also the option of Bullet Repayment along with the option of regular EMIs and Partial Repayment. The Bullet Repayment structure is where the borrower has to repay the loan amount in full, along with the interest at the end of the loan tenure. No amount is required to be paid during the loan tenure. Borrowers must understand these repayment structures, so that they can make an informed decision, when they are required to pick one.
Loan to value ratio: To get maximum amount of loan vis-à-vis the gold that is pledged, the borrower must understand and calculate the loan to value ratio. Creditors calculate the value of your gold and based on that, they usually sanction a loan of up to 75% of total value.
Replacing gold: Banks make agreements with jewellers to check the purity of gold. There are some fraud cases vis-à-vis banks and gold loan providers where the branch manager in connivance with jewelers, had replaced the original gold pledged by the customer. They had replaced the original gold with an alloy or silver jewelry, cheating customers.
Credibility of the lender: There are several NBFCs in India who offer attractive terms on gold loans. However, some of them could be poorly run and could possibly shut down without notice, leaving you to suffer a huge loss. It is very important to study the various lenders and choose the ones who enjoy a good reputation.
The gold loan lenders are mainly private banks and NBFCs. It is also questionable if these institutes have a proper customer care team to address customer complaints and grievances.
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