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What is a Gold Loan?

It is an age-old belief that an investment in gold is made to provide for a rainy day. In case of the dire need of funds, the gold would be sold or pledged with a moneylender. It is believed that the interest burden for the Gold Loan, when pledged with a money lender, would be so high that people preferred selling the good in times of need than pledge it.

These issues have been overcome now, with a lot of players in the market providing loan against the pledge of gold at very competitive rates of interest. Gold Loan is as good as a Personal Loan with security by way of pledge of gold coins or gold ornaments.

Gold coins bought from anywhere else other than banks are not accepted as security for the Gold Loan. Security by way of gold coins is accepted only to the extent of 50 grams. If the loan quantum required needs pledge of gold above 50 grams, then it should be by way of gold ornaments. A mix of gold coins and gold ornaments is permitted subject to the weight of the gold coins not being more than 50 grams. The Reserve Bank of India (RBI) has issued guidelines that gold coins above 50 grams should not be accepted as security for Gold Loans.

The Gold Loan does not involve laborious documentation. The process that the sanction of Gold Loan involves is the submission of the duly completed and signed application form followed by the appraisal of the gold by the approved appraiser of the bank/financial institution. The amount to be sanctioned depends on the value of the gold pledged.

Why is Gold Loan Preferred?

The Gold Loan is preferred for the following reasons:

  • The security stipulated is a commodity which is available at almost every Indian home
  • The procedure involved for a Gold Loan is very simple and the loan will be disbursed at the blink of any eye. It is that easy to avail a Gold Loan.
  • There is no elaborate verification in respect of income, credit score, etc. Even a housewife who has no income but has sufficient gold to pledge can avail a Gold Loan.
  • There is no need to produce any proof for the genuine purchase of the gold that is being pledged.
  • It is an all-purpose loan that can be used for any purpose. It can be used for planning a wedding, planning a holiday, purchase of gadgets, for education expenses, purchase of property, etc. The end use of the proceeds will not be questioned.

Features and Benefits of Gold Loan

The benefits and features of the Gold Loan are as detailed below:

Purpose: It is an all-purpose loan. It can be used for various purposes except for notorious activities and activities objected by law. It can be used for consolidation of debts, for planning a wedding, for travel, for medical emergencies, for purchase of gold jewellery, etc.

Gold is given for agricultural as well as non-agricultural purposes. In the case of agriculture, the loan is given for crop cultivation and for investment in farm equipment and also for allied-agricultural activities.

Eligibility: The basic requirement is the availability of the required quantity of gold. Also, the age of the applicant should be above 18. The applicant should be able to enter into a contract with the bank/financial institution and for that, the permitted age is above 18 years. In the case of Gold Loan for agricultural purposes, proof of landholding has to be submitted. This is required since Gold Loans given for agricultural purposes are eligible for interest subvention.

Quantum: The loan quantum is proportionate to the weight of the gold pledged. The rate per gram of gold with regard to the loan is fixed by the lending institution, which varies from time to time. It depends on the prevailing market rate for gold. Different lenders have different rates as per the credit policy of the institution. The quantum can also be based on the total market value of the gold being pledged. A margin of 25% to 35% will be set on the market price of the gold. In other words, loan-to-value (LTV) will be 65% to 75% of the market price of the gold pledged. In the case of Gold Loan for agricultural purposes, the loan is based on the scale of finance.

Interest: The interest rates are much lesser than the rates applied to Personal Loans. If the quantity of gold is relatively greater than the loan opted for, some of the lenders further reduce the rate of interest. Interest is based on the purity of gold in some of the banks/financial institutions.

Turnaround time: The process involved for availing a Gold Loan is checking the purity and weight of the gold by the appraiser, which will give the instant quantum eligibility. The documentation is also minimal. Some of the institutions restrict the documentation to an application-cum-agreement form that can be completed with great ease. The sanctioned amount will be instantly credited to your bank account. The turnaround time for the whole process can be as quick as the blink of any eye.

Repayment: There are multiple options for repayment of the Gold Loan. The repayment options vary from lender to lender but will be within the options mentioned below:

  • The loan can be repaid in a structured way that is, in easy instalments by way of Equated Monthly Instalments (EMIs). This is tailor-made for persons who have a regular source of income like salaried individuals.
  • The loan can be availed in the form of an overdraft. This is generally preferred by businessmen who will be needing funds for day-to-day operations of the business. They would prefer having access to funds at all times. In other words, they should be able to withdraw money when required and the funds that are credited back to the account should be available for utilisation again when required instead of going for a fresh loan every time. Also, by opting for an overdraft facility, they can have a control on the interest payable since under this facility interest is applied only on the amount utilised and will on every day balance in the account.
  • EMI only for interest and principal can be paid as and when funds are available. In this option, interest should be paid as and when due and part payments can be made towards the principal. This is again is preferred by businessmen who would opt to pay the principal amount as and when there is a surplus inflow of funds into the business.
  • Bullet payment is payment of both interest and principal in one lump sum on the maturity of the loan. For persons who have made an investment and will be expecting a lump sum amount in the future, this option will be convenient. For instance, any investment made in a fixed deposit or a recurring deposit will fetch a lump sum amount on maturity which can be utilised to clear the Gold Loan outstanding.

Processing charges: The processing charges will be very nominal. Some of the banks provide Gold Loans at zero processing charges.

Pre-closure charges: Banks/financial institutions allow closure of the Gold Loan before maturity at nil or nominal charges.

No income proof required: Though some of the banks/financial institutions prefer applicants with a stable income, most of them do not insist on income proof.

Credit score: Gold is a security which can be liquidated very easily. This quality of security is the reason that financial institutions provide Gold Loans to applicants even with a low credit score or no credit score. A credit score is not a mandatory eligibility criterion for availing a Gold Loan.

Security measures: You can confidently pledge your gold with reputed financial institutions without being sceptical about the safety measures. The gold pledged with these institutions will be highly secure since they are stored in safety vaults kept in strong rooms.

Gold Loan Interest Rates

Gold Loan interest rates at different banks are as given below:

Name of the Bank Gold Loan Interest Rate

Syndicate Bank

10.25% p.a.

ICICI Bank

10% to 16.70% p.a.

Kotak Mahindra Bank

10.5% to 17% p.a.

HDFC Bank

10.15% to 22.05% p.a.

Canara Bank

11.90% p.a.

Axis Bank

15% to 17.5%

Bank of Baroda

13.75% p.a.

Andhra Bank

10.70% p.a.

State Bank of India

9.65% p.a.

Central Bank of India

10.50% p.a.

Union Bank of India

10.17% to 10.95% p.a.

Allahabad Bank

10,20% to 14.20% p.a.

Punjab National Bank

10% to 11% p.a.

Eligibility Norms for Gold Loan

The following are the eligibility criteria for availing a Gold Loan:

  • The applicant should be aged above 18 years
  • The applicant should have the gold of 18 to 22-carat purity to pledge for the loan. If gold coins are pledged, then the purity should be 24 carats.
  • If the loan is availed for agricultural purposes, proof of landholding should be available
  • Some of the banks/institutions insist on a stable income though most of them don't

Documents Required for Gold Loan

The documents required for a Gold Loan are as mentioned below:

  • Residential proof: Aadhaar Card, Voter's ID Card, Driving Licence, Utility bills, etc.
  • Photo identity proof: Passport, PAN Card, Driving Licence, Voter's ID Card, etc.
  • Passport-seized photographs
  • Proof of landholding if the Gold Loan is availed for agriculture and allied activities

Gold Loan Vs. Personal Loan

The difference between Gold Loan and Personal Loan are explained below:

Gold Loan Personal Loan

Gold Loan is a secured loan

A Personal loan is an unsecured loan

To avail a Gold Loan, there is no need for income proof as well as a good credit score.

A good score preferably above 700 is required and a minimum of 3 years' work experience indicating stable income is compulsorily required.

 

In the case of businessmen, the business with a vintage of 3 years and profit-making for at least the past 2 years is required.

The loan can be utilised for any purpose except in the case of a loan availed for agricultural purpose. If availed for the purpose of agriculture, then it should be for raising a crop or for investment in farm machinery or any agricultural allied activities.

The loan is an all-purpose loan without any restrictions on end-use.

The quantum is decided by the weight of the gold that is going to be pledged. The gold should be of 18 to 22 carat. The quantum normally will be up to 75% of the market price of the gold. In some banks, an amount per gram is stipulated as per the market trend and it will be based on this value and the weight of the gold.

The loan is based on the income of the applicant.

The margin of 25% to 35% on the market price of the gold will be stipulated. LTV will be 65% to 75% of the market value of the gold.

No margin is required. 100% loan will be provided with a stipulation of 40% to 60% debt to income ratio. The net take-home salary after providing for the existing commitments and the proposed EMI should be 40% to 60% of the gross salary.

There are various repayment options, but normally it is a short-term to medium-term loan.

The loan can be repaid within 5 years

The loan processing is simple due to the liquidity nature of the security.

Elaborate verification process since the loan is unsecured.

Simple documentation

Process and assessment are elaborate, but the documentation is simple.

If the instalments have been defaulted or if there is an undue delay in clearing the dues in the loan, the gold pledged will be auctioned and the outstanding will be cleared with the auction proceeds. If there is any residual amount after the adjustment, the same will be credited to the bank account of the applicant.

There is no recourse for recovery other than initiating recovery steps since there is no security.

Most of the banks/financial institutions do not charge any processing fees and even if charged, it will be nominal. No pre-payment charges for Gold Loan.

Both processing charges and pre-payment charges are collected at rates between 1% to 4% on the outstanding balance.

The loan can be availed by anybody who is 18 years old or above and is having gold to pledge.

Can be availed only by individuals, self-employed individuals/professionals, and businessmen who have a stable income.

The rate of interest is competitive

The rate of interest is on the higher side

Things to Consider While Availing a Gold Loan

You should be aware and consider some of these things enunciated below before applying for a Gold Loan:

Background check

You should understand the background of the person/institution where you are pledging your valuable asset and availing a loan. If you are approaching a local pawnbroker to avail a Gold Loan, the procedure may be simple and you may be getting the loan immediately. But what is the safety of your security? There could be a theft in the shop and the gold may be stolen or there may be a fire accident. Anything could happen. What is the safe-keeping measure adopted? This is the most important factor you have to consider while you are pledging your gold to avail the loan.

You should do a background check about the institution where you are pledging your asset and ascertain that the transaction that is being put through is not a fraudulent one.

To avoid all these doubts and fears, it is always recommended to approach banks/financial institutions of good repute.  The safe-keeping of the gold is ensured in these places. The gold will be stored in fire and burglary proof safety vaults which are kept inside a strong room. The gold that is in the custody of these institutions will also be covered by insurance.

Market research

You have to do market research to understand the best deal. The first institution you are approaching may not be giving you the deal that you deserve. Do a thorough research and collect comparative data of the interest rates, processing fees, appraisal charges, pre-closure charges, etc.  Break down the comparative data to about five or six and choose the best among them.

Check who is giving you the best option when it comes to the loan amount. Each institution has a different level of margin stipulated. Go for the deal where you get the highest value for the asset.

Repayment

Understand the various repayment options that are available and choose the one that is comfortable for you. You should also understand the expenditure involved in respect of the interest out-go in each option. Have a discussion with the lender and decide on the option only when you have understood the implications each option carries. The various repayment options are:

Equated monthly instalments: If you are a salaried person or a person with regular income, this option will be ideal for you. The EMI consists of both the interest and the principal component and so the principal gets reduced proportionately. The interest is charged on the outstanding balance and so the interest component keeps decreasing and eventually, the adjustment towards the principal component out of the EMI will increase. This will keep control of your expenditure towards interest.

No pre-payment charges are collected for Gold Loans. In between, if you have surplus funds, you can deposit the same in the loan account. The principal component will reduce to that extent and you can save on the interest out-go.

Bullet payment: You may not be able to make a commitment for payment every month but are able to pay the money in a lump sum sometime later, then the bullet payment is the option for you. You can pay the accumulated interest and the principal at the time of maturity in one lump sum. In this case, the interest will be compounded every quarter and so the interest you will be paying at the end of the term will be considerably high.

Overdraft facility: This is a revolving facility and the interest will be charged on the amount that will be utilised. You can operate this account throughout the term that is stipulated. During this period, you can withdraw the amount whenever you need and deposit back when the funds are available. This is similar to a current account, but the difference is the funds in the current account is your own funds for which you do not pay any interest, whereas in an overdraft facility you will be utilising the funds provided by the financial institution for which you will have to pay a cost.

Partial repayment: In this option, there is no repayment pattern drawn by the bank/financial institution which has to be followed. You can make a payment whenever funds are available. This is again suitable for persons who do not have a regular income. This is suitable for businessmen who do not have a regular pattern for income.

EMI only for interest: You will be paying the interest whenever due and the principal amount will be paid at the end of the tenure. This way, you will be avoiding compounding of interest.

Margin

A margin is set between 25% to 35% for Gold Loans. If the LTV Ratio is high, then the risk factor for the lenders increases. So, they consider various factors while fixing the LTV. If you are a long-standing customer of the bank and have a good relationship, you can negotiate on the margin. Otherwise, the margin set is 25% to 35%. If in case the borrower fails to pay both the principal and the interest on the due date, then the interest keeps accumulating which results in the erosion of margin, which increases the risk factor for the borrowers.

Gold accepted for pledge

Gold only in the form of ornaments is accepted as security. Gold bars and coins are not accepted as security. However, Gold coins purchased from banks which are of 24-carat purity are accepted, but there is a restriction on the quantity. Gold coins only up to 50 grams can be accepted as security as per the guidelines of the Reserve Bank of India.

If you want a higher quantum, then it can be combined security of both the gold coins and the ornaments.

Purity of gold

Before approaching a lender, you should know the purity of the gold that you are going to pledge. Banks/financial institutions accept only gold with 18 to 22-carat purity. For gold coins, the purity level expected is 24 carats. It is better you pledge ornaments with no gems studded in them since the weight of the gems will not be considered and you may end up getting a lower loan amount.

Be aware of all the above important factors before approaching the bank/financial institutions and strike the best deal.

Frequently Asked Questions - Gold Loan

What are the factors that go to decide the loan quantum in case of a Gold Loan?

The loan quantum is decided on the weight of the gold that is offered as security. If gold ornaments with gems studded are offered as security, the weight of the gems will be excluded from the overall weight of the ornament.

The value of the gold pledged is then arrived at as per the prevailing market rate. The loan quantum decided will be as per the LTV stipulated which differs from lender to lender. It may be from 65% to 75% of the market value of the security.

Explain the repercussion when the market price of the gold declines during the tenure of the Gold Loans?

If the price of the gold declines, the LTV value will increase and that means the risk factor for the lender increases. There will be erosion in the margin. If the margin erosion is more than the required level, then the borrower may be requested to deposit the amount required to bring the margin to the required level. The other option will be to bring in additional security.

Is the customer required to have an account with the lender to avail the loan?

Yes. The customer will be asked to open a Savings Bank Account at the time of availing the loan.

What are the safety measures adopted to keep the security under custody safe?

Lenders ensure the utmost safety of the gold in their custody. The gold will be kept in vaults that are fireproof and these vaults will be kept in strong rooms which comply with the highest security stipulations. Insurance cover for fire and burglary will be available for the gold kept in their custody.

Do Gold Loans require a third-party guarantee?

No. No third-party guarantee is insisted for Gold Loans.

What are the recovery measures adopted in case of default in a Gold Loan?

If the Gold Loan has defaulted beyond the required period and the borrower fails to make payment despite several reminders and consistent effort by the lenders, the gold that is pledged will be auctioned. The auction will be done only on giving prior notice to the borrower and after a notification in the local newspapers. Then proceeds of the auction will be first adjusted towards the outstanding in the Gold Loan account and the balance will be credited to the savings bank account of the borrower.

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