We Indians love gold. For many, gold is like a saving account or a nest egg that will come in useful someday. One can be reasonably sure that even those of us of the most modest circumstances will still have some amount of the shiny metal tucked away somewhere. So why not use that gold to get a loan when in need? Many Indian banks and non-banking financial corporations (NBFCs) saw the wisdom in this and started to offer gold loans.
Sometimes financial needs crop up and liquidity could be an issue. In some cases, a regular loan may not be available or additional loan amount/credit may be necessary. One of the loan options available is a loan in lieu of jewellery and gold ornaments including gold coins issued by banks. For many, a gold loan makes sense because it is like putting your asset to work; an asset that may otherwise be lying unused in a locker.
Popular NBFC Muthoot Finance offers gold loans starting as low as Rs. 1,500 whereas a nationalised bank like SBI offers gold loans between Rs. 20,000 and 50 lakhs. A processing fee (flat or percentage of the loan amount) may or may not be levied depending upon the organisation one opts to take a loan from. The amount of the loan is typically 75 to 90% of the total value of the gold/jewellery pledged.
Usually, gold loans carry a lower interest rate since this is seen as a secured loan. There may be no or very low pre-payment penalties in this kind of loan. Even someone with a low credit score can get this kind of loan.
Any businessperson, professional, farmer, trader or self-employed individual can apply. While SBI offer loans to any earning individual above the age of 18, a corporation like Bajaj Finserv has an age bracket where loans are offered to people between the age of 21 and 70. In other words, the loan applicant should have the wherewithal to repay the loan, but the age criteria could defer from one to another organisation. Some organisations also offer special gold loans for women.
An application can be made online or even via a phone app. Some corporations require only KYC details of the application in terms of documentation, whereas some others may require proof of income.
The gold /ornaments are examined for purity and valued either by the lender or by an independent assessor. In some cases, the borrower may have to bear the costs of the assessor. It is important to remember that in case of gems studded ornaments, only the value of the gold will be taken into account for purposes of valuation. Gold bars of over 50 grams may be excluded. The gold and/ornaments are retained in the possession of the lender until full repayment. So during the pendency of the loan, one does not get to use the gold or ornaments.
The loan repayment schedule can be flexible; typically between 6 and 36 months. Repayment can be via EMIs or bullet repayment. In the event of loan default, the bank or NBFC has the option to recover their outstanding by auctioning the gold/ ornaments that form the loan collateral. So, while a gold loan is a great option for some of us, it may not be suitable for others.
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