Gold prices have been touching record highs since the pandemic hit. This has got many wondering how they can make use of their physical gold. The managing director of the World Gold Council had revealed that Indian households have accumulated up to 25,000 tonnes of gold. Since there has been a liquidity crunch in the market, many people who have gold at home are considering gold loans as an option to meet their financial requirements.
Many Indian financial institutions have a lot of options on offer. Gold loan companies and banks have witnessed a surge in demand for gold loans in the last three months.
Learn how consumers can get gold loans in India, understand the big question of why gold loans and some of the frequently asked questions regarding gold loans.
What Do You Mean by a Gold Loan?
A gold loan or in other words loan against gold means acquiring a loan by giving gold jewellery as collateral to the lender and the loan amount is usually based on the current market value and quality of gold that you have pledged.
For example, say 85% of the gold jewellery that has been pledged and we have to repay the loan in instalments along with interest. Once the loan has been repaid with interest, the gold jewellery that has been hypothecated will be returned to the borrower. It is a secured loan where the gold article that has been given as collateral range between 18 to 24 carats of gold.
Why is a Gold Loan Taken?
Gold loan is generally taken to meet short-term credit requirements such as for a wedding in the family or a medical emergency or education. Gold loan is always preferred to oversell your gold jewellery because you do not lose money and if you pay the money back on time with the interest you will get back your gold.
What are the Benefits of Taking a Gold Loan?
- The processing of a gold loan is faster than any other loan because there is a minimum documentation requirement as it is secured in nature.
- Just like a personal loan there is flexibility for you to use the loan to meet any type of expenses.
- It is ideal to generate easy cash but it is difficult to sell gold especially physical gold hence gold loans are preferred over selling physical gold as it is and it is the perfect solution to raise money.
Who Can Apply for a Gold Loan?
Any adult person who is 18 years or above can apply for a gold loan if they have any gold asset to give as collateral. They can also be a salaried person, a housewife or any self-employed person.
How Long does it Take to Sanction a Gold Loan?
The loan process has become very fast in India. We can even get a loan within a day if all the necessary documents are in place.
What is the Basic Process of Applying for a Gold Loan?
In order to avail of a gold loan firstly, the borrower has to submit their gold assets to the lender who will check the purity of the cold. Based on which the loan amount shall be determined after considering the market value of the gold. As per the RBI guidelines, the maximum value of a loan that can be given against gold is the sum is 75% of the value of gold. In other words, it is after deducting a processing fee.
What are the Documents Required for Processing a Loan Application?
Like any other loan, the documents that are required to apply for a gold loan are similar. You will need two passport size photos, one identity proof (PAN card, voter ID card, Aadhaar card etc) and one address proof (passport, drivers license, electricity bill). If you do not have a PAN card you can also submit form 60.
You may also need to supply income proof if requested.
Is There Any Minimum or Maximum Amount for Availing Gold Loans?
Gold loans are available through different lenders and the amount can be generally between Rs 1000 to 1.5,00,00,000. It may change from each lender. As per the guidelines of each financial institution, some loan requests for more than Rs 1.5,00,00,000 might require management approval.
What are the Repayment Options?
We can repay the gold loan through EMI. There are several other options for repayment. For example, you can pay the interest amount in the beginning and pay the principal at the end of the loan period.
What is the Repayment Tenure of a Gold Loan?
Several lenders have a bullet scheme tenure of 12 months which can be renewed for another 24 months with the same loan documents after submitting a request letter for renewal from the customer. Interest payment can be quarterly /half-yearly and yearly. Companies also have schemes with a tenure of 36 months. No renewal is required during the tenure with the monthly interest scheme. EMI Scheme Tenure is available for a range of 12,24,36,48 months.
Do We Need a Guarantor to Avail of Gold Loans?
Generally, financial institutions do not require a guarantor in the case of gold loans but it may change as per the policy of the lenders.
What are the Interest Rates and Processing Fees for Gold Loans?
Several nationalized banks, private banks and NBFCs disbursed gold loans at affordable rates. However, the rate of interest generally ranges from 10% to 17% with a nominal processing fee ranging from 1 to 2.5% of the loan amount. Along with the interest rate and processing fees, several hidden charges may be charged by the lender from the borrower, so one must always be careful and read all the offer documents before taking a loan.
For example, check the late payment charges and prepayment charges with the lender before applying for the loan. It is always advisable to compare interest rates processing fees with various vendors before applying for the loan.
What are Some of the Things to Keep in Mind for a Gold Loan?
Gold loans are secured in nature, hence borrowers should be very careful about the loan repayment. A default in the report will harm the borrower's credit score and it will further hamper or lead to cancellation of any loan applications in the future. So one should take a gold loan only if the need arises with a guarantee of repayment.
Can an Overdraft Facility for Business Needs be Taken on a Gold Loan?
Sometimes financial institutions give their customers the option to avail of overdraft for 3-12 months. Customers can utilise funds as per their requirements to the extent of the limit sanctioned depending on the policies of the lenders.
Is it Mandatory to have a Co-Applicant When Applying for Loan Against Gold?
Most financial institutions do not require you to have a co-applicant when applying for Gold Loan.
Is There a Lock-in Period for Gold Loans?
Generally, financial institutions do not have any lock-in period but it may change from lender to lender.
How Safe is the Gold that has been Hypothecated to the Bank?
Banks take a lot of precautions similar to that of cash and other securities while storing gold. They keep it in sealed packets which are in joint custodians of the bank until the loan is repaid in full by the customer. Gold Packets will be handled safely and swiftly every time by Bank Officials. CCTV cameras are working 24/7 in such banks.
However in case of any loss of gold due to theft the gold value will be re-reimbursed to the lender-borrower based on the current gold price prevailing as part of the weight and purity of the gold. This also depends and keeps on changing as per the lender. So it is advisable to read the documents in this regard. Lenders usually ensure the gold that has been hypothecated with them is safe.
Is There any Process for Part Release of Gold?
Some financial institutions have the option where once the borrower has paid back a part of the loan amount they can release some gold based on the value of the gold. Whereas some financial institutions allow you to make a part payment, the gold jewellery will be released only after the entire outstanding amount is repaid.
How are Loans Disbursed?
Generally, the disbursement will happen by way of fund transfer to the account of the customer or cash or NEFT and RTGS as per the policy of the lender.
Is the Fee for Applying for a Loan Against Gold Refundable?
No, lenders charge a non-refundable processing fee and valuation fee for every loan against the gold application.
How is the Interest on Loan Against Gold Calculated?
Most financial institutions charge interest against the gold loan. It is calculated based on simple interest on the loan amount that is outstanding.
What Happens if a Borrower Defaults on Any Payment or is Unable to Pay the Dues Up to the Due Date?
Lenders will take some kind of action against defaulters. For example, they may either charge a late fee for the period the amount is overdue. This rate is generally higher than the rate of interest which is paid on the loan. In case of a default in payment, a notice is sent to the borrower with the details within which they will have to pay their dues. Non-payers will also get a final notice regarding their gold being auctioned to recover the due amount.
Are There Any Prepayment Charges or Foreclosure Charges?
Generally lenders levy prepayment charges for a gold loan which generally ranges between 1% to 3% of the principal amount outstanding. It depends and changes from each lender. So it is advisable to discuss it with the lender before taking the loan.
What Happens In-Case of Any Damage to the Ornaments at the Time of Appraising?
Appraising is generally done when the customers are present. Due care and diligence are taken during the process of appraisal to ensure that there is no damage done to the ornaments or jewellery at the time of appraisal at the time of storage. In case any such event takes place, the gold is generally ensured by the financial institutions so that there are chances that any damages will be borne by the insurance company. However, these policies change for every lender. So it is advisable to keep these factors in mind at the time of applying for the loan.
What are Some of the Gold Loan Schemes Offered by Different Lenders?
There are generally two categories of loan schemes that are generally provided. They are as follows:-
- Higher loan to value loans - In these types of loans maximum amount of loan is offered on a per gram basis. Simultaneously to keep the extra risk in check the interest charges are higher as compared to others. This type of gold loan has a tenure of three months.
- Low-interest rate loans - In these types of loans the interest rate is lower but the loan offered on a per gram basis is comparatively less.
Several other schemes are tailored as per the customer's requirements keeping in mind the loan amount that is required, the gold given against the loan and the periodicity of interest and principal repayment.
In conclusion, in case you need some financial assistance when you are facing some financial challenge and are not willing to sell your jewellery, it is better to use it as collateral to pay and get a gold loan. It is an excellent way to get funds quickly when the need arises. People generally prefer a gold loan over other loans because of its low interest rate and faster processing.
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