What is a Gold Loan?
Gold Loans are loans secured by gold jewellery, in which the customer deposits gold jewellery as security with the Gold Loan provider. Upon receiving the gold, the company grants the customer an amount based on its current market value.
In India, taking on a Gold Loan is quite easy and secure, and has been a practice for decades. It is not uncommon for people to pledge gold ornaments as collateral to get funding to cover a huge expense or even to launch a new business. Banks and non-banking financial companies (NBFCs) offer gold loans.
A gold loan is a secured financial debt where gold jewellery serves as collateral. At the time of the loan application, the gold market rate is used to calculate the gold’s market price per gram. The calculation considers only the value of the gold parts of the jewellery. It excludes all other metals, stones, and gems from its calculation.
An individual borrows the amount against gold securing the gold ornaments with the lender as collateral. Lenders typically express loan amounts in terms of percentages. It may range from 60% to 75% of the gold’s value. In most cases, the repayment of the debt takes place through monthly installments. You will receive your gold back once you have repaid the borrowed amount including interest. Refer to the below data in order to get a better idea of how much you are going to pay if you pledge one lakh worth of Gold with a lender.
Gold Loan is the best option for short-term credit needs. For example, financial assistance for a family wedding, a medical emergency, or a child’s education. It is better to borrow money by pledging your gold ornaments rather than selling your jewellery. Therefore, we can conclude that you should take a Gold Loan instead of selling your jewellery if needed.
In response to the economic impact of the pandemic, the World Gold Council said gold loans have been in high demand through both banks and non-banking financial companies.
A Gold Loan offers the following Key Features:
Purpose of Gold Loan:
There are a number of reasons why you may want to take out a gold loan. For instance, it could be to finance educational expenses, wedding expenses, go on a holiday, pay for medical emergencies, etc.
Pledged Gold acts as a Security:
There is a significant amount of gold pledged with the bank or financial institution. This gold acts as a guarantee against which the loan amount can be provided.
Gold Loan Tenure:
As compared to many other loans, the repayment period for gold loans tends to be relatively shorter. Typically, the tenure of any Gold Loan falls between a long-term (maximum 24 months) and a short-term (minimum 6 months). It should be noted that long-term loans are usually repaid in installments, while short-term loans are usually repaid as a lump sum.
- Long-term Gold Loan – In the case of a monthly installment loan, you could repay the loan in up to 24 installments per year if you choose monthly payments. Basically, this means that the entire tenure of the Gold Loan is 24 months. However, even if you choose a shorter loan repayment period, such as 12 months, you will still be able to repay your loan before the end date. As long as you pay at least three installments, the banks do not impose any prepayment charges if you close the loan before the term you choose.
- Short-term Gold Loan – The maximum tenure for repaying a Gold Loan during the short Gold Loan tenure is 6 months at a fixed interest rate, which is the maximum repayment term. After the loan tenure has ended, you have the option of repaying the entire loan in a single lump sum. Prepayment penalties are not applicable on this type of loan, as well, if you pay back the loan before the six months are up.
Options for Repayment of Gold Loan:
There are 4 different options available for a borrower to repay back the Gold Loan. Let us look into these four options:
- Pay Interest as EMI & Principal later: Gold loans are repaid using this method, where you repay interest due according to the EMI schedule given to you by the lender. The principal can be paid off with one single payment, however. At the maturity of the loan, you can make only a single payment. The reason borrowers prefer these methods of repayment is that they can repay only the interest amount without worrying about paying the principal as well.
- Make Partial Payments: With this type of gold loan repayment, you do not have to adhere to the EMI schedule set by the lender. You can pay interest and principal in partial installments as and when you wish. You can also customize your repayment schedule according to your financial situation. Choosing to pay off your principal at the beginning reduces your daily interest payments. Interest calculation depends on the loan amount that remains outstanding. As a result, you save a considerable amount on the serviceable interest.
- Bullet Repayment: As part of the bullet repayment plan, you must pay both interest and principal at the end of the loan’s tenure. During the loan tenure, you will never have to worry about paying back the Gold Loan. When the loan tenure ends, you can simply make the entire payment without having to adhere to any EMI schedule. Each month, interest is accumulated but not due until the Gold Loan term is over. Known as a bullet repayment plan because it entails one payment, this form of gold loan repayment requires one payment.
- Regular EMI Option: EMI-based gold loan repayments are ideal for salaried individuals with a fixed monthly income. The outstanding EMI amount for repayment includes both interest and principal amounts. Since this loan is favorable to salaried individuals, it is approved faster.
Different Charges Associated with a Gold Loan:
It is possible to impose a number of other fees in addition to the interest rate. These could include processing fees, documentation fees, appraiser fees, late payment fees, and overdue loan fees. Cumulatively, these charges can raise the total cost of the loan. You should therefore be aware of the charges levied by the lender before applying for a gold loan.
Factors Influencing Gold Loan Interest Rates:
- Market price of gold – In the event that gold’s price is high in the market, the value of the gold ornaments or coins that you are pledging will also be high. When such a scenario occurs, the lender will offer you a lower interest rate since the risk involved is relatively low. By selling/auctioning off the gold ornaments, the lender can easily recover the outstanding amount owed to the lender. As the gold market price is high so he will be able to get a good price for the pledged gold. You may find yourself in this situation if you are unable to pay back the loan amount.
- The inflation rates – A high inflation rate would mean that the value of a currency would depreciate. As such, people would tend to accumulate more gold in their possession. When inflationary conditions persist for a longer period of time, gold can act as a hedge against such conditions. This pushes the gold price higher as a consequence. In this scenario, if you apply for a gold loan, you might qualify for lower interest rates.
- Relations with the bank – The vast majority of banks provide gold loans to their existing customers without much documentation. But individuals without an established relationship with a bank may be able to apply for a gold loan as well. Additionally, existing customers of lending institutions tend to negotiate lower interest rates than new ones.
Frequently Asked Questions (FAQ’s) – Gold Loan
Gold Loans are available to individuals who are traders, businessmen, salaried employees, self-employed or farmers. Different banks have different age requirements. People who are between the ages of 18 and 60 years can apply, provided that they have a gold asset to pledge.
The following documents must be submitted in order to apply for a Gold Loan:a.)Two passport-sized photos.b.)A Gold Loan application form must be duly completed by the applicant.c.)Identity Proof (Aadhar/Pan Card).d.)Proof of the borrower's address (Aadhar card/Electricity bill/Ration card/Passport/Telephone bill).
The following are some of the reasons why you might consider a Gold Loan:a.)If you need a loan on an urgent basis for a short period.b.)If you possess gold ornaments which you are willing to pledge.c.)If you wish to avoid cumbersome paperwork as the Gold Loan requires only very basic KYC documentation.d.)If you wish to avoid the requirement for a CIBIL score or credit history.e.)If you wish to reduce the cost of borrowing.f.)If you wish to avoid any pre-payment charges.
It is not a good idea to obtain a Gold Loan if:a.)You are seeking a loan with a duration greater than 36 months.b.)You do not trust handing over your gold ornaments to a third party/bank/NBFC. But the safest way to keep your jewellery is to keep it in a bank or with an specialized finance company.c.)You do not agree with the restriction that you will not be able to use your jewellery during the loan period.
These days it is possible to calculate the interest rate on a Gold Loan by using an online calculator. However, the interest on Gold Loans is calculated based on the following three factors:a.)Amount of loan you wish to obtain.b.)The repayment period of the loan.c.)The rate of interest that is in effect. In general, the interest rate on a loan depends on the bank or financial institution from which you seek the loan.
Using an online EMI calculator, it is relatively easy to determine your Gold Loan EMI. When doing it manually, there is greater possibility of making mistakes. Therefore, it is advisable to use an online EMI calculator. In order to use an EMI calculator, you need to provide the following information:a.)The rate of interest.b.)The loan amount.c.)The duration of the loan.
The EMI on Gold Loans refers to the amount you need to pay on a monthly basis to the financial institution or bank from which the loan was obtained. It is the amount you must repay to the respective bank or NBFC. Your EMI includes both the interest and the principal components. In the initial months, interest is typically higher and decreases with subsequent installments.A Gold Loan EMI calculator is a tool that allows you to calculate your monthly EMIs for a given loan period at a given interest rate. EMIs are determined by the loan tenure, loan amount, and interest rate:a.)Interest Rate: If interest rate on Gold Loan is high, EMIs will also be high.b.)Loan Amount: The EMI will be high if the loan amount is high.c.)Loan Tenure: EMI goes down if the loan term is longer and vice versa.
Your credit score will be affected if you fail to repay your Gold Loan on time. The lender bank will report this information to the credit bureaus, which will negatively impact your credit score.Defaulting on the loan amount completely may result in the loss of the pledged gold. If you default on your loan, the lender has every right to sell your gold to recover the outstanding balance.
The following are some of the benefits of borrowing money against your gold:(a.)It is simple and fast to process. Neither a credit card history nor proof of income is required; you only need a gold asset to pledge.(b.)The documentation required for a Gold Loan is simple and involves only a limited number of documents.(c.)Gold Loans are offered at a lower interest rate when compared to unsecured loans, such as personal loans, which have an interest rate of 15% and higher.
The availability of Gold Loans across major cities is now provided by specialised NBFCs and banks. Following the RBI notification, both banks and NBFCs now offer a loan-to-value of 75%. Comparing the following will indicate which company you should use for a Gold Loan:Banks in India offer Gold Loans at a lower interest rate compared to NBFCs. Public sector banks offer even lower interest rates. The reason is that the cost of funds is lower in banks.As compared to banks, NBFCs disburse loans faster. NBFCs require only your KYC document, thereby requiring less documentation. It is only NBFCs that offer the option of paying interest during the loan period and the principal loan amount at the end of the loan period. Prepayment penalties are not charged by NBFCs.Thus, if you require a Gold Loan with a lower interest rate, a bank should be your first choice. To determine the most favourable rate for a Gold Loan, you should compare the Gold Loan interest rates offered by different banks. Conversely, if you desire a simple and quick loan, an NBFC should be your first choice. In either case, it is prudent to perform a Gold Loan comparison.
Before the loan can be executed, the borrower will be required to pay a loan processing fee of up to 1% of the loan amount. Some lenders charge a processing fee, while others do not. In addition, you may be required to pay a valuation fee. If the lender has an in-house appraiser, then the valuation fee may be waived. These fees are therefore specific to each lender.There are lenders who charge renewal fees based on the loan amount and stamp duty depending on the state laws. Depending on the lender, you may also be subject to a penalty for late payment.In addition, your lender may charge you GST or service tax as well as a prepayment penalty if you repay the loan before its term expires. Charges differ from one lender to another, so it is crucial to compare costs. Certain lenders may not charge any prepayment penalties.
Typically, the loan period is three to twelve months. Repayment cannot exceed two and a half years, and funds must be returned within 30 months (or 36 months, depending on the lender). The loan can be renewed by the lender if you wish to extend the repayment period.
Applying for a Gold Loan is an easy and fast process. You may be able to get your loan on the same day if you have all the necessary documents in place.
Gold Loans are now handled by professional institutions, which store your jewellery in a safe vault monitored by a 24-hour surveillance system. Many lenders insure the gold that is pledged to them against theft. Even in the event of a robbery, you will receive an amount equivalent to the market value of the gold.
You must bring your gold assets to the lending institution in order to obtain a Gold Loan. Gold purity is checked, and based on this, the amount of the loan is determined. After verifying the market value of the gold, the loan is approved. In line with RBI guidelines, this amount can be up to 75% of gold value.In other words, the amount of your loan cannot exceed 75% of the value of your gold. Your lender will then deduct a processing fee (usually not more than 1% of the total loan amount), following which your loan is paid out in cash (if the loan amount reaches Rs 20,000) or that it is transferred to your bank account.
Your Gold Loan is subject to a nominal processing fee. Generally, the fee charged by banks varies, but it does not exceed 2% of the loan amount. The bank will impose a gold validation fee in addition to the processing fee.
Foreclosure charges usually range between 0% and 3% of the outstanding amount of your Gold Loan.
Partial repayment of a Gold Loan can be made at any time. However, the gold you have deposited will only be returned once all of your loan has been repaid.
Unlike other loans, there is no requirement for either a Guarantor or an Introducer.
In the event that the transaction does not exceed one lakh, a bank account is not required. However, we recommend that all transactions be made through a bank account in order to comply with regulations.
From the perspective of a customer, the most important factors are transparency, security, and the option of selecting an appropriate loan product. Transparency would enable the customer to see for himself what he gets in return for the money he pays. This would prevent any unpleasant surprises and hidden costs. The strength of security relies not only upon the physical safety of the gold, but also on the internal systems and procedures at the company that ensure that there is no scope for any mala fide actions after the jewellery has been pledged. It is important that loan products are available in a range of LTVs (loan to value) and interest rates, with appropriate differences in the terms.
Below are some links that may be of interest to you:
 BANK |  CAR LOAN |  BUSINESS LOAN |  PERSONAL LOAN |  EDUCATION LOAN |
 GOLD LOAN |  WEDDING LOAN |  MEDICAL LOAN |  TRAVEL LOAN |  LOAN APPS |
