If you are on a temporary money crunch and have exhausted all your available sources of liquid cash, availing of a gold loan instead of a personal loan might be more beneficial for you. Availing of a gold loan is the easiest and simplest as compared to most other loans. All it requires is gold, a PAN card or Aadhaar card, and the requisite KYC (Know Your Customer) documents. Gold Loans also carry a lower interest rate as compared to personal loans, while still serving the same purpose. This loan can be easily availed by pledging your gold, either jewellery, coins, or bars, with the financial institutions against a loan amount. The institution runs a complete evaluation of your gold loan application before the loan is given against your gold.
Although gold loans have only recently started becoming popular, financial institutions are now actively opting and accepting gold against loan amounts. Gold loans are provided not just by Banking institutions but also by many Non-Banking Financial Companies (NBFCs), thus making gold loans easily available to all. However, there are several factors that need to be considered and understood before applying for a gold loan.
Value of gold
It is impossible to get the 100% value of gold when availing of a gold loan. Depending on the lender and their gold loan policies, the value for gold may vary between 60% to 90%. Lenders look for a minimum of 18-carat purity in the value of gold but ideally prefer 22-carat purities in the gold. When evaluating the value, lenders use one of the two methods; either the daily gold price is considered, or the weekly or fortnightly prices of gold are averaged and considered.
The gold loan rate is much lower than that of personal loans although they serve the same purpose. However, different banks, NBFCs, gold jewellers, and local lenders provide different interest rates. Ideally, they range anywhere between 9% and 20% according to the lender, although on average, they range between 13% and 15%. Generally, NBFCs charge a higher interest rate due to their higher cost of funds and local lenders charge irrational rates if they are fraudulent. Hence, do not pledge your gold with lenders who are not trustworthy.
Gold loans are a short-term facility
Gold loans have numerous benefits when compared to other loan options. However, there is a major downside to these loans; they are short-term facilities, meaning they are short term loans. Most institutions provide a 1-year period for gold loans. Some may extend it for 2 years, depending on the terms and conditions that have been mutually agreed on but not longer. Hence, before opting for a gold loan, be sure to check the duration of the loan and your ability to repay the loan within the agreed duration. Failure to do so would result in the institution auctioning your jewellery or gold bars and the resulting rate for your gold might not be favourable to you.
Credibility of the lender
Be sure to do a background check on the lender. Gold loans are provided not just by banking institutions but also by NBFCs, gold jewellers, and other individuals. Although most gold loan companies can be trusted, it is safer to do a credibility check on the local lenders as they are not regulated and dictate interest rates favourable to them while it is unfavourable to you. The value of the gold you pledge is generally higher than the loan rate. This acts as a guarantee for the lender but to safeguard your gold, you must essentially do a thorough background check on your lender.
Before availing of a gold loan, understanding the interest rates and the value of gold is important. However, it is equally essential to understand the repayment structure of the gold loan. With most lenders, the loans are flexible in terms of repayment. In most cases, the loan is paid in EMIs (Equated Monthly Instalments) and when all dues are paid, the gold security is returned to the borrower. Another option available to borrowers is bullet payment. In this payment method, the lender deducts the interest amount upfront from the loan amount. A third option available is the flexibility to pay interest as the EMI throughout the tenor and pay the principal at the end of the tenor.
Gold loans are not just simply quicker in terms of processing. It also requires lesser paperwork and does not require credit scores for sanctioning. However, it must be kept in mind that to avoid fraudulent lenders, you must approach organised financial institutions that are monitored by the Reserve Bank of India. Certain financial institutions charge valuation charges, processing fees, and outstanding loan charges up to 1%. You can find the best gold loans at Bajaj Finance Limited, the lending arm of the Bajaj Finserv Group at suitable interest rates, and with the right evaluation.