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Gold Loan: All You Need To Know Research Team | Posted On Saturday, March 16,2019, 03:51 PM

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Gold Loan: All You Need To Know



What Is Gold Loan?

Gold loan, also referred to as loan against gold, is a popular type of secured loan. Gold loan is availed by pledging physical gold with a lender in exchange for money. Your gold would be placed in a secure locker by the vendor, until you repay the dues.

Gold loan is similar to personal loan; there is no restriction on the purpose of utilization of funds received in gold loan. You can use the funds received as gold loan to pay children’s tuition fees, purchase a car, home renovation and so on. You can pledge gold jewelry and ornaments, coins and bars to avail gold loans.

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Gold Loan: All You Need To Know

Emotional Connect With Ancestral Gold

Gone are the days when people used to think twice on pledging gold. Indians traditionally pass gold from one generation to another. Indians had an emotional connect with the gold passed on from the previous generations and were valuing it immensely. But the trend has changed over the last decade and a half.

Various non banking financial companies or NBFCs, like Mannapuram Finance Limited and Muthoot Finance are established as popular gold loan lenders. NBFCs are preferred over banks when it comes to gold loans.

Liquid Nature Of Gold

Having physical gold is equivalent to having hard cash. Physical gold is highly liquid. You can exchange physical gold for cash, instantly. Most gold loan lenders offer instant gold loans. Having physical gold would help you fund all financial emergencies as you can avail gold loans or sell gold in a matter of few minutes.

SEE ALSO: What Is Gold Loan?

Features of Gold Loan

  • Secured Loan: Gold loan is a secured loan. Your credit score and credit history will not be checked. It doesn’t matter if you have a poor credit record. All you need to have is physical gold to avail gold loan. A secured loan is offered at a much lower interest rate than an unsecured loan.
  • Flexible Repayment: You can repay the loan either by EMIs (EMIs contain a certain percentage of both interest and principal) or pay only the interest on a regular basis and principal in lump sum at the end of loan tenure. Most gold loan lenders offer this feature of flexible repayment option. Flexible repayment options are not offered on personal loans. Gold loans are popular for this reason.
  • Benefit For Farmers: Individuals involved in agricultural activities are offered gold loans at a lower interest rate. The interest rate offered on gold loans for these individuals can be as low as 8% a year. Farmers generally prefer to avail gold loans over other kind of loans as gold loans are offered at a discounted rate of interest.
  • Quick Processing: Gold loan lenders are not bothered about your credit history as gold loan is a secured loan. Paper work and other formalities involved in gold loan processing is minimum, this is because the lender gets the possession of your gold in exchange for money, thereby enabling faster processing of gold loans.
  • Quick Disbursal Of Loans: Gold loans are disbursed instantly (within 10 minutes). Quick disbursal is enabled due to minimum documentation.
  • Different Disbursal Modes: If the loan amount availed is less than Rs 2 Lakhs, then you can opt to receive funds by cash or NEFT. If the loan amount exceeds Rs 2 Lakhs, then you would receive the funds only by RTGS.
  • No Or Minimum Foreclosure Charges: Most lenders don’t levy prepayment or foreclosure penalties. Few banks charge a very nominal amount towards prepayment or foreclosure charges.
  • Minimum Documentation: Very minimum documentation is required to process a gold loan. All you must have is a valid identity proof and a valid address proof. There is no need of producing income proof like pay slips, latest bank statement, Form 16, Income Tax Returns and so on. Having PAN card is not mandatory to avail gold loans.
  • No Restrictions On Funds Utilization: Funds received as gold loan can be used for any purpose. You can use funds received as gold loan for various requirements like purchasing / constructing / renovating a house, children’s tuition fees, purchasing a car and so on. Even personal loans have no restriction on the purpose or utilization of funds, but the interest rate on personal loans is much higher than gold loans.
  • Loan To Value Ratio: The LTV in a gold loan can be up to 75%. That is, the lender would offer a maximum of 75% of the market value of gold pledged as the loan amount. This can be negotiated depending on the lender and eligibility of the borrower.

SEE ALSO: Gold Loans Features

Procedure to Avail Gold Loan

Procedure involved in applying for gold loan is simple and hassle free. You must follow the below mentioned steps to apply and avail gold loan:

  • Walk in to the nearest branch of an NBFC or bank offering gold loan of your choice with the requisite documents.
  • Fill the application form with accurate details.
  • The lender would check your application form and ask for gold.
  • The lender would test the quality of gold.
  • The lender would weigh the gold.
  • The lender would quote the loan amount based on the quality and quantity of gold that you are pledging.
  • The lender would prepare the term sheet, the borrower must read all terms and conditions before signing it. Hand over a copy of the requisite documents, signed term sheet and application form to the lender.

Following documents are accepted as valid identity proof: Aadhaar Card, Voter ID, Valid Passport, Valid Driving License, Ration Card and so on.

Following documents are accepted as valid address proof: Electricity Bill, Water Bill, Property Tax Assessment, Attested Bank Passbook, Rental Agreement, Telephone Bills and so on.

  • The lender would hand over the loan amount. You can either ask for cash or NEFT if the loan amount is less than Rs 2 Lakhs. If the loan amount exceeds Rs 2 Lakhs, then the lender would pay you by RTGS.

Types Of Loans And Applicable Interest

No loan comes without interest. The purpose specific loans like home loans generally have lower interest rates when compared to personal loans. Education loans and car loans are good examples of purpose specific loans. The funds obtained from personal loans, gold loans and loans against property can be utilized for any purpose unlike home loans, in which the funds have to be used only on buy/construct/renovate a house.

Below tables show the interest rate offered on gold loan, personal loan and loan against property (loans that have no restrictions on the purpose of utilization):

Personal Loan:

Gold Loan

Loan Against Property

Tables below show the interest rates offered on purpose specific loans:

Home Loan

Car Loan:

Education Loan

Pros of Gold Loan

Below mentioned are the advantages of gold loans:

  • Low Interest Rates: Gold loans are offered at a lower interest rate when compared to personal loans as gold loans are secured loans. Lender gets possession of your gold and can recover dues in case you are not able to repay the loan within the loan tenure.
  • Instant Money: Physical gold is highly liquid. Gold can be exchanged for cash in a matter of few seconds. Most banks and NBFCs offer instant gold loans. With this high liquidity of gold, you can raise funds for emergencies with little or no fuss.
  • Minimal Documentation: The documentation and other formalities for gold loan is a bare minimum. All you must furnish is a valid identity proof and address proof. This feature has made the process of availing gold loans simple and hassle free.
  • Processing Fees: The processing fee on gold loans is quite low. There are lenders that offer gold loans at no processing fee. The processing fee on gold loans is in the range of 0.5 to 3%.
  • No Income Proof Needed: Gold loans are secured loans. You pledge gold in exchange for money. You don’t have to furnish income proof documents to avail gold loans. This is a big advantage for unemployed individuals who are in need of funds for an emergency. 
  • Credit Score Not Needed: Lenders don’t check credit score and credit history as you are pledging gold as a security / collateral. This is a big advantage for those individuals that have a poor credit history.
  • Safety: Your gold would be safely placed in a locker by the lender and is heavily guarded at all times. The lender is responsible for your gold once pledged. Your gold would be handed back over to you once you repay the gold loan in full.  

Cons of Gold Loan

Below mentioned are the disadvantages of gold loan:

  • Lower Loan To Value Ratio: The loan to value ratio LTV, in a gold loan is decided on the basis of current market value of gold pledged. Loan to value ratio varies across lenders. However, the Reserve Bank of India, RBI, has mandated all gold loan lenders to cap  LTV at 75%. This means, if market value of gold pledged is Rs 1 Lakh, then lenders can offer gold loan of up to Rs 75,000.
  • Lenders Can Auction Your Gold: If you fail to repay gold loan within the loan tenure, then the lender has all legal rights to auction your gold and recover dues.

Impact of Gold Price Fluctuation

Following is the impact of gold price fluctuation on gold loan:

  • LTV Remains Same At All Times: Regardless of the current gold price, the maximum loan to value ratio would be 75% as per RBI guidelines.
  • If you happen to purchase gold at a time when the price was high and because of an emergency you were forced to pledge gold in exchange for money at a time when gold price had crashed, then you would be getting lesser amount as gold loan. All gold loans are issued against the current market price of gold. The price at which you bought gold won’t play a factor in deciding LTV.
  • If you happen to purchase gold at a time when the price was low and you are forced to pledge gold at a time when gold price has sky rocketed, then you get a higher amount as gold loan.
  • Gold pledged with the lender does not get impacted due to the price fluctuation in market.

Common Mistakes Made At The Time Of Applying For Gold Loan

  • Not checking lender’s credibility: Gold loan is a secured loan, meaning the lender gets the possession of your gold in exchange for money. The gold shall be held by the lender until dues are cleared. The lender has all legal rights to sell your gold if you fail to repay the loan in time. This is the reason why lenders don’t check repayment capabilities like credit score and credit history. What if the lender turns out to be a fraud? Then, you would lose the gold pledged with the lender. You must verify the details of the lender. The best way to avoid gold loan fraud is to avail gold loans from banks and well established NBFCs. You mustn’t get attracted by low interest rates offered by small and new companies as the risk is high with these companies. Check for reviews before selecting a lender.
  • Not exploring and comparing lenders: Before you avail gold loan, you must explore and compare various lenders and then arrive at a decision. However, LTV offered on gold loans is capped at 75% as per RBI guidelines. Check all popular banks and non banking finance companies NBFCs, for interest rates. Few lenders offer lower interest rate depending on the eligibility of the potential borrower. Check if the lender allows flexible repayments.
  • Not Checking LTV Calculation: LTV, Loan to Value Ratio, is calculated based on the current market price of gold. LTV is calculated by lenders for risk assessment. Ask the lender to weigh gold in front of you and also ask him to calculate LTV in your presence. You can verify the calculations and raise concerns, if any, and clarify with the lender. Lender might make the wrong calculations and hence you must check and verify.
  • Being unaware of the quality of gold eligible for loan

Lenders offer gold loan only on gold jewelry and ornaments that are made of gold whose purity is 18 to 22 carat or above. In addition to the barrier of purity, precious gems studded in the ornaments, will not be considered and their weight will be deducted from the overall weight of the jewelry. If your gold doesn’t meet these criteria, then your gold loan application would be rejected by the lender without hesitation. Hence, make sure that you buy high purity gold; this would help you at a later stage.

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