Borrowing money

5 things to consider before opting for a gold loan

Many people in India have lost their jobs or seen their salaries drastically reduced during the pandemic. Growing uncertainty due to the global pandemic has also led to heightened risk aversion among lenders to extend credit in the form of personal loans or other forms of unsecured credit.

Now, many Indians have resorted to pledging their household gold instead of emergency cash to fund their expenses. Virtually every household in India owns gold in the form of jewelry, and despite the social stigma associated with pledging family heirlooms in exchange for credit, it is often seen as a last resort for fundraising, whether either to earn a living or for emergency medical expenses. .

Gold loans are among the easiest ways to get credit because they are considered a secured loan, unlike a personal loan, which is unsecured. One can approach a bank or a jewelry store and obtain a loan of up to 75% of the value of the asset, based on the current price of gold.

Moreover, where banks and lending institutions would be unwilling to provide unsecured loans for fear that they would go wrong, they are unlikely to refuse a gold loan.

That said, as with any other loan, here are a few things you need to know before taking out a gold loan, in order to get the most out of your gold loan and be able to repay the loan on time, and get your gold back.

Bank or NBFC

Although there are jewelers and small lenders who might be willing to provide gold loans, but ideally you should always choose a bank or non-bank financial institution (NBFC) as they are much safer.

Non-bank financial institutions

“Banks and NBFCs offer gold loans, but it is important to look at their rates, eligibility restrictions and loan amounts. Most banks, for example, charge an appraisal and processing fee of 1-2% on the loan amount, unlike NBFCs,” says Renisha Chainani, Head of Research at Augmont Gold For All, an integrated player gold.

That said, you might also want to consider an NBFC, as some of them specialize in gold lending and also offer lower interest rates and better terms.

Gold valuation

The quality or value of the gold plays an important role in determining the loan amount. Therefore, the purer the gold, the higher the valuation will be and, therefore, the loan amount. Indeed, the gold must be 18-24 carats, to qualify for a loan. In addition, the value is deducted if you want to take out a loan against a gold jewel set with stones. Only real gold is considered for a loan.

“As a gold loan is collateralized, the loan amount is based on the value of the gold you deposit as collateral. NBFCs can only lend up to 60% LTV (loan to value) at this time. , but banks can lend up to 75% LTV,” says Chainani.

An LTV of 60% means that if your gold is valued at Rs 1 lakh, you will get a loan amount of Rs 60,000.

Interest rate

Since the interest rate on a gold loan is determined by the lender’s risk assessment, it can vary from 7 to 25% per year. Lenders use the LTV ratio, loan term, loan amount and other parameters to establish the interest rate on gold loans.

Mandate

Gold Loans are short-term loans with repayment terms ranging from seven days to three years and offer a variety of repayment choices.

When choosing tenure, plan it so that you can be sure to repay the loan within that time frame. A longer term means that one has to pay higher interest.

Refund Options

For repayment options, several alternatives are available to borrowers, such as regular EMIs, bullet payments, and partial payments. In the case of a bullet loan, the repayment of the loan is considered monthly, but the total amount of the loan must be paid on the due date.

This may be an option, if one expects his finances to pick up when he is due to repay. One can choose the repayment option that suits him best. There are also processing fees and other charges to keep in mind.

Taking out a gold loan has now become much simpler than before. Many banks and NBFCs have also started providing home gold loans in recent years, where they inspect and appraise the gold at the borrower’s location and disburse the loan within hours.