Indians are among the largest gold consumers globally and the trend of buying the precious yellow metal is on the rise. Interestingly, most gold enthusiasts purchase for ornamental use and consider gold as a stable investment. The rise of gold value is a clear indication that it is considered a low-risk investment, thus making it a crowd favourite. Additionally, gold can help people during financial emergencies and no wonder many financial institutions provide loans based on pledging of gold.
Gold loan are a type of secured loans that are gaining prominence across borrowers and are seen as a viable alternative to unsecured loans where the interest rate is higher.
How does it work?
If you need funds and approach a lender for financial assistance, the lender might provide you with a loan based on the gold that you pledge for a certain period with an appropriate interest rate. The central bank of India, RBI has directed the financial institutions to provide loans up to 75%-80% of the gold value, which can vary from lender to another.
Once you pay back the principal amount along with interest, you can get back your gold from the lender. Financial institutions provide repayment options to the borrowers in the forms of EMI or one-time total payment.
An appraiser appointed by the lender would analyse the quality of gold and inform the lender who would fix the loan amount and charges like processing fees. While traditional lenders adopt age-old practices of gold quality assessment, modern lenders use sophisticated machines for the same. As a borrower, you can also use the gold loan calculator facility to know the loan details.
Important things to consider
- Loan amount: Compared to banks, most of the NBFCs are quite flexible regarding the loan amount. If you apply for a gold loan, the chances are that you can receive amounts as low as Rs.1500 with no maximum limit.
- Interest rate: Note that the interest rate for such types of finances increases with the loan amount. Smaller loans have comparatively lower interest rates, which might vary from one lender to another. Also, private lenders might charge more interest than banks & NBFCs in some instances. Hence, using a gold loan calculator is a wise decision.
- Tenure: The tenure can vary from two months and go up to four years depending on the scheme, loan amount, and the lender offering the loan.
- Loan collaterals: As mentioned before, gold loans are secured loans as lenders take the jewellery as collateral. If the borrowers default on the payments, the financial institutions have the right to claim the gold as per terms and conditions set during the application phase.
- Prepayment: Most NBFCs allow prepayment and part payment of loans, and some of them may charge you for pre-closure of loans. Also, the lock-in period might be prevalent for some lenders while most do not have the same.
- Processing fee: The lenders might levy a certain percentage of the loan amount as a processing fee, while others might waive off such charges to lure the borrowers.
- Late payment fee: Borrowers might face a penalty for late payment and are in such cases bound to the existing terms and conditions, which state the appropriate cost for such instances
- Credit score: Needless to say, credit score plays a vital role in all types of loans approval and processing. If you possess a higher credit score, you stand chances of quicker loan approval and lower interest rates.
Why are gold loans better?
If we compare gold loans to personal loans, they fair better in all departments as there is a lot of flexibility in terms of interest rate, tenure, lock-in period, processing fees, etc. The gold loan calculator can provide better insights about your loan and you can also negotiate with your lender to avail better deals. Due to a surge in the market competition for gold loan providers, borrowers’ stand a better chance to get more reasonable offers.
To make the most of the gold loan facility, partner with a reliable loan provider and improve your credit score to avail the loan at a lower interest rate. Read through the important pointers mentioned above to increase your chances of quicker gold loan approval and processing.
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