Gold Loans- Personal Loan Against Gold: A Financing Option For Short Term Needs

For Indians, gold is considered as an essential investment from a cultural, emotional and safety perspective. One bought, is a dead investment. It tends to lie in the locker not earning you any money. Why not make use of it in your time of need?  You can monetise this idle asset to help you tide over your financial need. So if ever you find yourself in need of money, consider gold loans as an option. Gold loans also know as gold deposits are loans given by banks/ NBFCs by taking gold as a security.

Gold loans are not new to the Indian market. It existed but in the unorganised sector where money lenders used gold as a security for providing loans. Now banks have entered this space in a big way because the market is very large considering the fact that most Indians tend to have sufficient investment in gold. More importantly, with more and more women working in the family, people have become broadminded. So the social stigma that was once attached to taking a loan on gold is gradually being eliminated.

Off late, this product has become popular because of the substantial rise in gold prices. The quantum of loan that one can get by giving gold as security has increased tremendously making it an attractive loan proposition.

What is the process to be followed to obtain a gold loan?

You offer your jewellery to the lender who can be a bank or an NBFC. The lender will evaluate the purity of the jewellery. The charge for evaluation is generally borne by the borrower. Once the evaluation is done, the paper work for the mortgage is done. Banks will ask you to produce personal documents such as Pan Card, address proof among other things. The lender will give you a loan which in most cases can be up to a maximum of 80% of the value of the jewellery. After having repaid the loan, you get your gold back from the lender.

Features

• Secured Loan: Gold loan is essentially borrowings against the security i.e. gold. Thus this loan should be taken only if you’re absolutely sure that you will be able to repay the loan else you may end up losing your gold.
• Tenure: Gold loans are typically for duration of 3 to 12 months. They are thus best used to fund short term monetary requirements.
• No end use restrictions: The loan can be taken for any purpose so long as the money is not being used for speculative purposes
• Loan amount: In most cases, the maximum loan value is not more than 80% of the value of gold. Most banks deal in relatively higher loan amounts. NBFCs on the other hand, deal in small value loans
• Interest Rate: The interest rate charged by banks can be in the range of 11.5% and 15%. Banks usually charge a processing fee while NBFCs may not charge the same. The rate of interest charged by NBFCs is much higher as compared to banks.
• Repayment: The loan can be foreclosed at any time without any penalty. In case of irregular payment of EMIs, a penal interest of up to 2% is charged by banks.
• Market risk: The lender retains the exposure to the market risk arising from movements in the market price of gold

Advantages

• Quick processing: Gold loans require minimum documentation and hence it can be resorted to in times of urgent need. Banks maintain that it takes a few hours to get a gold loan and some NBFCs state that it takes only a few minutes.
• More attractive than a personal loan: The rate of interest charged on gold loans tends to be much lower than that of a personal loan. Therefore, it may be worthwhile putting you asset to work and thus reducing your cost of loan.
• Emotional attachment will ensure timely payment: Most families have an emotional attachment to gold and that will make you morally responsible to repay the loan in time so that you can get back the gold that you had placed as a security
• Cash flow management: In a typical loan against gold transaction, only interest needs to be paid during the tenure of the loan and the principal amount has to be repaid at the end of the tenure. This allows customers the borrower to manage cash flows better.

In times of need of money for a short duration, you can resort to gold loans. Let your asset that you have built over years; be of use to you when you are undergoing a financial strain. Note that you should take a gold loan if and only if you are sure of repaying the loan in time. Else you may end up losing your most treasured asset.