Gold loans: Yellow metal to your rescue

Gold loans can be procured from banks, financial institutions at short notice

In case of emergencies, taking a loan against gold ornaments has become common in most middle-class families. Gold loan is a simpler and a quicker way of raising funds from financial institutions and banks, at short notice. With prices on the rise, the gold idling away in your locker can come in handy if you are cash-crunched.

But there are various nuances and aspects you need to keep in mind before opting for a gold loan.

Loan amount

The amount of loan that you are sanctioned by banks or gold-loan companies depends on the value of the gold pledged. It also depends on the loan-to-value (LTV). Essentially, lenders do not extend the entire value of the underlying gold as loans. The RBI has laid down the maximum LTV. It allows banks and non-banking financial companies to give loans up to 75 per cent of the value of the gold pledged. That is, pledging ten grams of gold (worth, say, 34,000) could fetch you a loan of about 25,500.


Easier to obtain

With gold as collateral, financial institutions classify gold loans as ‘secured’, and sanction and disburse them at a faster pace. Most banks and NBFCs disburse gold loans as soon as the purity of the gold is checked.

The documentation too is simple. Generally, the personal identity proof and the address proof are the only primary documents required. Income documents or credit score do not weigh much in the process of sanctioning the gold loan. “A common man, in the absence of formal credit history or inability to meet the requirements of the financial institutions, can obtain the gold loan in a very transparent, simple and quick manner,” says Vasudevan Ramaswami, COO, Muthoot Fincorp Limited.

Note that while credit history does not play a key role in sanctioning a gold loan, non-repayment of such loans within due dates would adversely impact the credit score of the borrower. This could affect your ability to take other loans in future.

Besides procedural ease, gold loans score high on cost to borrowers as well. Gold loans are offered at much lower interest rates compared to personal loans. For instance, SBI’s gold loan at the rate of 9.65 per cent per annum is much cheaper than their personal loan, which is offered at above 11 per cent per annum. Further, the processing fee for gold loans is marginal or nil. Also, most of the financial institutions do not charge any fee in the event of foreclosure of the loan account. “Loans can be closed even after one day or can be re-pledged for a new loan as per need,” says Ranjan Sreedharan, spokesperson, Manappuram Finance.

Flexible repayment options

Gold loans also offer flexible repayment options. Apart from EMIs, a bullet repayment option too is available. In this, the principal amount due can be repaid at the end of the tenure, but interest payments have to be made periodically.

Banks also offer over draft (OD) facility on gold loans. In this case, the lender opens an OD account in the customer’s name to which the loan value granted will be credited. That amount can be used as and when required, but only up to the allowed credit limit. Interest will be charged only on the amount used. Few banks also offer debit cards to withdraw the money from such accounts.

NBFCs also offer services similar to OD. Muthoot Blue allows customers to top up their loans based on the collateral value of the gold available, by simply sending an SMS.

Manappuram Finance also offers Online Gold Loan product which is almost equivalent to an overdraft facility. Credit is provided to the customer against the gold pledged, which can be withdrawn as per need.

Almost all banks and NBFCs have the option to renew gold loans based on the value of the gold deposited as collateral.

Also, interest rebates and discounts or rewards are offered by few NBFCs on repayments within the due date. Banks such as ICICI Bank offer gifts on renewal of the gold loan.