Gold is an integral part of the Indian investment portfolio. Also, there’s a lot of social significance to buying gold—it is bought during certain festivals, given as a gift and, of course, is an integral part of weddings.
Most of us own some gold and one can fall back on it when times are tough. These could be for emergency medical expenses, cost for repairs of a house and so on. In such situations, a gold loan could come to the rescue. With financial instability caused due to the pandemic, gold loans have become popular.
However, like any other loan, there are a few things you need to know before you apply for a gold loan. This will ensure that you get the maximum out of your gold loan and can also pay back in due time.
Borrow From A Bank Or NBFC
There are informal sources that extend gold loans in the markets, including small-time jewellers and lenders, but you should always choose a bank or a non-banking financial company (NBFC) as they are safer options. Remember that a gold loan is a secured loan and you have to deposit your asset with the lender.
“Both banks and NBFCs provide gold loans, so it's important to examine their rates, eligibility restrictions, and loan amounts. Most banks, for example, impose a valuation and processing fee of 1-2 per cent of the loan amount, whereas NBFCs do not,” says Renisha Chainani, head of research, Augmont Gold For All, an integrated gold firm with operations from refining to retailing.
Look At The Valuation Of Gold
The loan amount will depend on the value of the gold. So, the purer the gold, the higher will be the valuation and the loan amount. In fact, to be eligible for a loan, the gold must be of 18 or 24 carats. Also, if you want to take a loan against gold jewellery, which is set with stones, that value will be deducted. Only the actual gold price will be considered for the purpose of the loan.
“Because a gold loan is secured, the loan amount is based on the value of the gold you deposit as collateral. NBFCs can only lend up to 60 per cent LTV ( loan to value) at the moment, but banks can lend up to 75 per cent LTV,” says Chainani. A 60 per cent LTV means if your gold is valued at Rs 1 lakh, you can avail of a loan of Rs 60,000.
Compare Interest Rates
The interest rate on a gold loan is decided by the lender's risk assessment of the borrower. It can range between 7 per cent and 25 per cent per annum. LTV ratio, loan tenure, loan amount, and other parameters are used by lenders to establish the interest rate on gold loans.
Compare rates between different lenders to choose the best deal. Some NBFCs specialize in gold loans and offer lower interest rates and better terms and conditions.
Also, keep in mind processing fees and other charges.
Choose A Tenure You Are Comfortable With
Gold loans are short-term loans with repayment terms ranging from seven days to three years and offer a variety of repayment choices. Choose a tenure with which you are comfortable in terms of your cash flows and other expenses. The longer the tenure, the lower the equated monthly instalments (EMIs), typically. However, remember that a longer tenure also means that you have to pay more interest amount.
Check The Repayment Options
Regular EMIs, bullet payments and partial payments are among the various alternatives available to borrowers for repayment of gold loans.
In case of a bullet loan, the repayment is considered as monthly, but you can pay the entire loan amount at maturity. This can be an option if you expect your finances to pick up at the time when you need to repay.
Taking a gold loan is like a social stigma for borrowers in India as it points to extreme financial distress and is considered among the last options to raise money. Many NBFCs and banks have started doorstep gold loans in the last few years, where gold is inspected and valued at the borrower’s place and is disbursed in a few hours.