The demand for gold-backed funds continues to rise, with small businesses and low-income groups mostly bearing the brunt of the pandemic-driven recession.
- The nationwidelockdowns had driven the growth of gold loan outstanding to Rs.62,101 crore this year from Rs.46,415 in May 2020.
According to industry insiders, this is an indication of rising financial stress among economically backwards individuals. However, individuals seeking gold loans to meet such financial shortcomings must be aware of all aspects of this financial product before applying to make an informed decision.
- Low interest rate
The gold loan interest rate is generally much lower compared to other financial products, especially unsecured ones. This is primarily due to the high security that the pledged gold items offer to lenders against a possible default. However, these rates vary across lending platforms. Therefore, individuals must compare the interest rates offered by different lenders under various schemes before choosing the one most suitable for them.
- Zero processing charges
Like any other financial product, gold-backed funds also involve other charges besides interest. Most gold loan providers levyzero processing charges when sanctioning funds. This can bring down the borrowing cost substantially, making gold loans a way more affordable solution than most other financing modes.
However, individuals should enquire their lender for other charges applicable for instances like late penalty and foreclosure, among others.
- Short loan tenor
Loans against gold jewellery make for an excellent short-term funding option since most lenders offer compact repayment tenors against these.
As a result, borrowers can take a gold loan and get done with its repayment quite fast, instead of having to burden themselves with debts over a long time.
A short loan tenor also reduces the total interest outgo. As a result, concerned individuals can easily avail of such funding to bridge temporary gaps in cash flow without incurring a hefty borrowing cost.
- Flexible repayment structure
One of the factors that can help individuals decide which option is better between a gold loan and a personal loan is the former’s available repayment facilities.
Leading financial institutions allow borrowers to repay via the following 3 primary methods:
- Individuals with regular cash flow can opt for the traditional EMI payments. Here, every instalment comprises a principal and an interest component.
- They can also choose to repay the principal amount at the tenor’s end. In this case, borrowers need to pay interest on a monthly or quarterly basis throughout the repayment period.
- Alternatively, individuals can pay the interest amount at first and then the principal amount within the tenor.
Here is a simple example to illustrate the last method. An individual incurs a total interest of Rs.15,000 against a loan worth Rs.2 lakh. If he/she opts for the last method, the lender will deduct the interest amount and provide a loan amount of Rs.1,85,000. The borrower will then need to repay the principal amount of Rs.2 lakh by the tenor’s end.
Note that these structures may differ across lending platforms. Therefore, enquire your chosen lender about their available repayment facilities before choosing your most suitable gold loan.
- Optimum loan amount
Individuals can avail a substantially large sum against gold jewellery.
This is due to the high loan-to-value (LTV) ratio of this metal. To add to the benefits of a gold loan, the RBI increased this maximum LTV ratio from 75% to 90% in 2020. This was primarily to help borrowers compensate for financial losses due to layoffs and salary cuts during successive lockdowns. Financial institutions take this factor into consideration when sanctioning funds.
Additionally, they evaluate collateralson the basis of their authenticity and exact purity. Most lenders accept gold items of 18K-24K purity.
The higher the purity, the greater will be the available loan amount. However, individuals should opt for the exact amount they need. Otherwise, a default due to over-borrowing can lead to auctioning of your pledged valuables.
- Accepted collateral type
An important aspect to note before applying for gold-backed funds is the type of gold items accepted as collateral.
Most financial institutions require applicants to pledge only gold jewellery items to qualify for funds. Other types of gold items like gold coins and bars are often not considered eligible collaterals for this secured funding.
Also, note that loan providers do not accept stone-studded gold ornaments as collateral. Therefore, concerned individuals should prioritise pledging only pure gold jewellery items.
- Eligibility and documentation
Loans against gold generally come with easy eligibility. Generally, businessmen, salaried individuals, farmers, and traders, alike can avail of a gold loan if they are aged between 21 and 70 years.
As far as documentation is concerned, applicants only need to submit their KYC documents. Such simple and minimal paperwork also speed up loan disbursal, making gold loans ideal for emergencies.
Besides the above factors, individuals must also know how to apply for a gold loan in advance. Almost all lenders allow individuals to apply for such funds online by simply filling in an application form on their website. Once done, applicants can complete the verification and gold appraisal process with a representative to get the gold loan approval and disbursal.