There are several ways to borrow money when you are hit by emergencies or crisis. Generally, unsecured loans like personal and credit card loans and secured loans against your assets are the most popular options. One of the simplest and most convenient borrowing options is a loan against gold.
The yellow metal not only secures you from uncertainty and inflation but also helps you access some quick credit when in need. A gold loan is easier to obtain because credit and income restrictions get reduced when collateral is provided. With the recent increase in the loan-to-value ratio by the RBI, from 75% to 90%, people can now obtain more credit on their gold.
What are Gold Loans?
A gold loan is what a person borrows from a bank or institution by pledging his gold jewelry or coins as collateral. The loan amount granted to the borrower depends on the market value and quality of the gold he is willing to pledge. As it is a type of secured loan, there is no focus on the borrower’s credit history, which means anybody can obtain a gold loan if he possesses assets.
No lender gives 100% of the value of gold as a loan. The maximum loan-to-value for gold loans was previously limited to 75% which has now been extended to up to 90% of the market price of the metal. The best gold loan gives you several benefits like low interest rates, the flexibility of repayment, and a hassle-free, instant money disbursal.
What Determines the Loan Amount?
Most lenders offer loans on pure gold, minimum of 18 carats. The higher the purity of gold, the better is the valuation and thus the loan amount. When you pledge your gold jewelry, the lender doesn’t consider the value of gems and stones but only values the gold. Moreover, several lenders avoid giving loans against gold bars but accept gold coins with a purity of 99.99% and up to 50 grams of weight.
How to Choose the Lender?
When it comes to picking a lender to apply for a gold loan, there are two primary options available. You can either take a gold loan from a bank or a Non-Banking Financial Company. You should avoid small shops and jewelers because they are not regulated and can expose unfavorable conditions.
There are some reputed NBFCs that primarily focus on gold loans. These institutions may offer flexible repayment options and liberal gold valuation methods. This means you can quickly obtain a high loan amount for your gold with a hassle-free documentation process.
When you apply for gold loan with a reputed financial institution, you can get up to 90% of the value of your gold and low-interest rates. However, it is important to do some research and background checks of the lender before applying. See that the lender takes appropriate safety measures for your assets. The credibility of the lender matters because you are keeping your valuable assets with them.
What are the Interest Rates?
The gold loan rate of interest varies from lender to lender. In general, the rate of interest ranges from 8% to 30% depending on several factors including the loan amount, tenor, risk assessment, and repayment options chosen. Some lenders may charge a higher interest rate for giving a higher loan to value ratio as there more risk is involved. However, the rate is usually lower than other types of loans.
What is the Repayment Structure?
The repayment structure is another important consideration for a gold loan. The best lenders offer several options when it comes to repaying your amount. The tenor of this type of loan generally ranges between 12 and 60 months, with some companies even offering up to 7 years of loan tenors. However, most lenders have a shorter loan tenor of 24-36 months in most cases.
Gold loans usually offer a flexible repayment structure as compared to other types of loans. The repayment process for gold loans is different for different banks and financial institutions. Most lenders give you the option to pay the monthly interest on the loan amount throughout the tenor and pay the principal amount at the end to take back the gold.
Some other institutions even provide the option of monthly installments to pay a part of the amount and interest every month during the tenor.
What are the Charges applicable on Gold Loans?
There is a processing fee associated with gold loans, a percentage of the loan amount that differs based on the lender you select. Apart from this charge, some lenders can also levy valuation charges. You should ask about these charges before applying for the loan. While there is no prepayment on gold loans, some banks and institutions may ask for up to 1% of the loan amount as prepayment.
As gold prices keep changing, borrowers should keep in mind that they may be asked to pledge additional gold during the tenor there are major changes. Ideally, the loan amount should be 75%-90% of the total value of the gold. Moreover, if the borrower fails to repay the loan on time, lenders can auction or sell the gold assets to acquire their money. However, most lenders send multiple reminders before doing this.
Gold loans can help you manage a financial emergency by giving you access to quick funds at a low rate of interest. This type of loan is particularly useful for those who don’t have a good credit history. However, it is important to choose the tenor and repayment method that suits your financial condition.