India is world’s second biggest gold consumer, and Indians’ love to gather more gold has never diminished over the years. It’s been estimated by the World Gold Council that about 22,000 tonnes of gold remains idle with the Indian citizens. This has spurred the Government, banks and NBFCs to promote gold loans aggressively in India to bring them out and convert into a financial asset.

Gold loans are secured loans wherein your gold articles are pledged to get money for your financial needs and emergencies. It is a cheaper loan when compared to personal and credit card loans. Here is all you need to know about gold loans and how you can get the best rates and maximum amount.

How does gold loan work?

Gold loans are granted in lieu of depositing gold jewels, coins, bars, etc., with the lender. One can get up to 80% value of the gold articles pledged as the loan amount. However, the loan amount varies from lender to lender depending on the internal policies of the bank. Gold loans can be applied by any Indian resident who owns the gold articles.

After you take the gold article to the lender, it will be evaluated by an appraiser who would determine the quality and market price. Once you agree to the loan amount and other charges, you may proceed with the documentation. The loan amount will be disbursed to your bank account post approval, and the gold will be withheld by the lender.

The repayment starts right after you have received the loan amount. The entire loan amount must be repaid with the interest as determined by the lender. The maximum repayment period on a gold loan is generally up to 2 years. However, some lender might offer you longer tenure.

Features of Gold Loans

  • Loan Amount: One can get gold loan amount of minimum Rs. 10,000. However, this may vary for urban areas, wherein the minimum amount may start from Rs. 25,000. With most lenders, there is no maximum limit on a gold loan; you can pledge as much gold articles you have to get the loan.
  • Tenure: The minimum tenure on a gold loan may start from 3 to 6 months. The maximum tenure offered in a gold loan is 4 years. However, most lenders allow only up to 2 years as the maximum repayment period.
  • Interest Rate: The interest rate on a gold loan starts from 10.50% onwards, and it can go up to 19%. However, the interest rates are still higher when you pledge your gold with NBFCs and private lenders.
  • Collateral: The gold articles act as the collateral. They will be retained by the lender until you close the loan completely.  If there are continuous defaults, the gold will be auctioned by the lender to recover the losses.
  • Prepayment: The borrower can choose to pre-close the loan before the tenure ends. Most of the NBFCs do not charge any fee for preclosure. However, the banks charge a certain percentage of loan amount as prepayment penalty. It could range between 1% to 3%. Most lenders do not have a minimum lock-in period as the gold loans have shorter tenure. If there is one, it can range between 1 to 6 months.
  • Processing Fees: Some of the NBFCs waive off the processing fees in order to attract customers. However, most banks levy a processing fee of certain percentage of the loan amount. It could range between 0.50% and 2%, and GST is applicable along with the processing fee.
  • Late Payment: Late payment on a gold loan can cost you more. The lender may charge a certain fee for late payment. The amount of fee varies from lender to lender. It is generally up to 2% p. a. over and above applicable rate of interest.

Why are gold loans better than personal loans?

Let’s consider a situation wherein you need money for a sudden financial emergency, and you have a pre-approved personal loan offer at an interest rate of 14%. At the same time, you have sufficient gold ornaments that remains idle in your house. Would you prefer a gold loan or a personal loan?

The best decision would be to opt for a gold loan. You stand to lose nothing but save some money. The following table will help you understand better.

 

 Gold Loan 

 Personal Loan 

 Loan Amount 

 Rs. 2 Lakhs 

 Rs. 2 Lakhs 

 Tenure 

 2 years 

 2 years 

 Interest Rate 

 11.25% 

 14% 

 EMI 

 9345 

 9698 

 Total loan amount with   interest 

 Rs. 2,24,273 

 Rs. 2,32,736 

 Savings 

 Rs. 8463 

 

As the interest rates in gold loan are lower than a personal loan, you can save a considerable amount. Apart from that, a gold loan is processed immediately, and the loan amount is disbursed within a day. A personal loan can take more time as it involves longer documentation procedure than a gold loan.

Comparatively, processing fees on gold loans are significantly lower than a personal loan which can get you additional savings. Every personal loan has a lock-in period, and pre-closure can be done only after completing it. Pre-closure on a personal loan comes with fee that are usually up to 5% of the outstanding principal amount. On the other hand, gold loans taken from NBFCs can be prepaid any time with no penalty which is a huge advantage over a personal loan.

Getting a low interest rate personal loan is only possible if you have a good credit score. If you have no credit score, the minimum interest rate would start from 16% which can become a debt burden especially when you choose a long tenure. The chances of approval are lower if you have bad credit score. In a gold loan, you can obtain low interest rate as you provide the gold as security. Moreover, the chances are rejection are lower for borrowers with bad credit.

Bottomline

With so many advantages, a gold loan is one of the best ways to meet any kind of financial contingencies. The only downside of the gold loan is that your gold is put to risk by pledging to the lender. Hence, ensure that the repayments are done on time and the loan is properly closed.