What is a Gold Loan – Tips and Advice

When a customer pledges gold (including jewelry, ornaments and bank-issued coins) as collateral for taking a loan, it is known as a gold loan. The bank/lender uses the gold as security against 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 can range 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 the short term, then this type of loan might be a good option.

What are the advantages of a gold loan?

Lower interest rate on gold loans: In general, interest rates on these loans are lower than on personal loans since this is a relatively low-risk loan for lenders as they hold your gold as collateral. The interest rate also varies depending on how much you want to borrow in relation to the total value of the gold you have pledged. The interest rates are lower when the loan amount is not more than 50-60% of the total value of the gold pledged. However, if the amount borrowed is high as compared to the value of the gold, the interest rate will be correspondingly higher.  For example, if you pledge Rs. 1,00,000 worth of jewelry and borrow an amount of Rs.50,000 you will get a better (lower) interest rate on gold loan than if you pledge the same value of gold but want to borrow Rs.70,000.

Quick process: In India, gold loans are some of the quickest loans to be sanctioned as the banks have your gold as security in case of default, removing the need for checks on credit scores or reports. The loan can be approved, over the counter, in a matter of minutes or just a few hours. Many lenders can have your gold valued quickly and sanction the loan immediately, after verification of the purity and value of the gold.

No income proof required: In many cases, you are not even required to submit a salary certificate since your gold is held as security by the lender. So, even if you are currently unemployed or do not have a good credit score, you will still be eligible for this kind of loan. However, it is possible that some lenders might ask for a salary certificate for loans above a certain amount.

Things to keep in mind before deciding on a gold loan

Emotional issue: Gold as an asset has emotional value in India since it is largely in the form of family jewelry.  Providing gold as a collateral means that you run the risk of losing your family jewelry in case you are unable to repay the loan. This can cause undue mental and emotional pressure not just on the borrower but the entire family. So think carefully if you will be able to pay back the loan in full before you apply. It is good to have a proven track record of making loan repayments so that you are confident about your ability to recover your gold.

Quality of lender: There are several NBFCs in the country who offer attractive terms for these loans. However, some of them could be poorly run and could possibly shut down without notice leaving you at a loss.  It is very important to study the various lenders and choose one that has a good reputation. In addition to these NBFCs, several nationalized and private banks offer gold loans.

Quality of gold: Usually, only gold of 18K value and above is accepted by lenders. You also need to be above 21 years of age to apply for this type of loan.

If you think you a gold loan is a good option for you but are unsure who to approach, CreditMantri can put you in touch with reputable lenders who suit your individual requirements