Gold Loan is a type of secured loan and has become important in 2020 which has been an unkind year for many. People have lost their jobs, businesses have shut down or have become unviable, and unlikely lives have been lost to the virus. All this and more has put a great strain on people’s finances and people have had to rely on loans to tide over this situation.
Types of Loans
Now understanding the various types of loans, their features, and their interest rates can greatly help a person make the correct decision while taking a loan.
For example: If a loan is needed for a relatively longer period like a year or so – a credit card is not the way to go – these are exorbitantly priced ~40% interest per annum and can affect your credit score and also make your interest free period 0 for future purchases also till you pay full outstanding on the card. Instead one should opt for a personal loan.
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Moreover, if a person has gold jewellery or any other form of gold that is not in use, the person should instead opt for gold loans because these loans have lower interest charges and can be availed quickly in a hassle-free way. Banks and NBFCs don’t usually ask for a lot of documentation and income proofs are also not required because of the yellow collateral.
In this article, we will discuss all you need to know before taking a gold loan
Where to borrow from?
This is the most important consideration in the case of gold loans. This is because you have to deposit your gold with the lender hence their creditworthiness is of utmost importance.
Don’t ever go with your neighborhood gold shops or pawn shops etc because who knows if you will get your gold back and in the original condition. Secondly, since the terms are not standard, you might be left at the whims and fancies of the establishment in case of a default or late payment.
Gold loans are easily available through Banks and NBFCs. If it was not convenient enough, startups like Rupeek have entered this space and claim to provide loans at your doorstep within 30 minutes.
Quantum of Loan against collateral
Another important consideration while taking a loan is how much of a loan you can get for a said amount of jewellery or vice versa – how less jewellery you need to keep for said amount of loan.
This is dictated by LTV which is Loan to Value. RBI regulates this for the organized players and it was 75% until recently. However, to alleviate the pains during coronavirus, RBI has temporarily allowed (till 1st April 2021) banks to loan out up to 90% of the value.
For example: If the value of the collateral is ~Rs 1 Lakh, NBFCs can loan up to Rs 75,000 and banks can lend up to Rs 90,000. Hence, you might be better off with banks in this period.
However, there are 2 caveats:
First, LTV regulation from RBI is for cap and banks/ NBFCs may decide to loan lesser than the said percentage. So comparison on those grounds is important.
Second, the valuation of gold may also differ from lender to lender so it is important to know who is valuing the most.
To summarise, knowing the rupee amount that you can get for your jewellery is important which would be a combination of LTV and the valuation of the gold. Also, since it is not cost-effective to have the gold valued from multiple places (appraising cost has to be borne by the applicant), it is good to have reviews from people who are already experienced in the process.
Requirements for collateral
Generally, the value of stones and diamonds are not considered, only gold is considered while arriving at the value. Also, there might be a minimum purity criterion which is generally 18 carat. Moreover, there might be conditions like the maximum weight of an ornament which can be considered for collateral & restrictions on types of items like bars /coins, etc on which loan might not be given. It’s good to understand these requirements in advance so as not to face disappointment.
Interest Rates on Gold Loan
This is actually the most important factor after hygiene considerations (like borrowing from trustworthy sources and availability, eligibility, etc). Rates for gold loans may have a very large range of ~8-30%. No wonder, choosing the correct lender is imperative otherwise raising money at 30% for a secured loan is just nuts.
In the research that I did, I found the rates for SBI to be most competitive, however, their procedures may be old school and not user-friendly because of which people might be tempted to choose other options. If you are willing to put in some work and are able to secure a loan from SBI, it should be good because well, trust is not an issue with SBI.
Gold Loan Structure & other charges
Generally, gold loans are relatively short term in nature. They range from a year to around 3 years. There are various structures available – EMI, interest upfront, and principal at the end, total repayment at the end, etc. You can also get the loan as an overdraft on the account and use it as and when required.
Unlike home loans, earlier repayment actually may attract prepayment charges which maybe around 1% of outstanding. Further, default on payments might lead to, the lender selling off your valuables to clear your debt. This however is done only after multiple reminders.
Therefore it is important to choose the correct structure as per your requirement.
Note: Since the price of gold fluctuates, there might be a case where the value of gold drops below the ‘Outstanding/ LTV Ratio’ and there might be a requirement of part repayment or additional gold pledge. Policy for this case might also be important to note.
For example, if the current outstanding is 90,000 and the gold value which was originally 1L has now dropped to 95,000. Even at 90% LTV the gold is not sufficient so either there has to be partial repayment or additional gold must be deposited.
While a need to take a personal loan is never a great sign of personal finance however, many times being upfront with the issues and tackling them head-on is the best option. Hence, it might be better to take action and apply for a personal loan instead of suffering either credit card debts due to inaction or maybe letting a fruitful business opportunity go.
Moreover, if you have gold at home which is not in immediate use, be transparent with the family and take a gold loan at better rates instead. Also, do keep the above-mentioned points in mind while doing so.
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Ravi is an IIM ranker with over 9 years of work experience and has helped optimize the growth and financial performance of companies like BPCL, Sun, Ola, Swiggy, Curefit, and Rupeek. In this blog, he explains how to improve personal finances, do growth hacking through digital marketing or other initiatives, and provides a sneak peek into the financial models of companies – especially startups.