Why Gold loans are so popular in India?

Historically and even today Indians have been known for their love for the yellow metal. So whether one is rich or poor, lives in rural India or urban India they are likely to have some gold with them. How much they have will obviously depend on their economic status but gold is one asset which each Indian is likely to have. Moreover it is often passed down from one generation to another; during weddings the parents and relatives traditionally gift gold to the newlyweds and people often keep adding to their kitty on festivals like Diwali or when they have surplus cash to invest.  So if one needs funds then rather than exploring other options one could easily borrow against an asset that they already have at home in the form of Gold. Here are a few reasons why gold loans are popular in India.

 

Simple to Procure:

Gold loans are very simple to get when compared to other loans. The lender and the borrower are both happy with it. Loan being a liquid asset, does not pose any issues for the lender if the borrower fails to pay; on the other hand the borrower simply uses an asset which he/she has to get money. Unlike other loans there is very less paper work involved. There are no eligibility criteria to be met by the borrower, no income proof required and so on. This makes the processing time much faster and one could get the money the same day also which could things easier in times of an emergency.

 

Lower Interest Rates:

Gold loans are available at lower rates when compared to personal loans. So when one needs funds they can take a personal loan or borrow against the assets that they already have. Personal loans as we already said are available at higher rates; if one uses a loan calculator they will easily be able to distinguish the kind of monthly burden each loan would come with. If we consider other options then it is not necessary that everyone would own a house and even if they own one then they might want to risk mortgaging their house. Borrowing against securities comes with its own problem. When you borrow against securities the loan value will be related to the market value of the securities which keeps on changing with market conditions. Even after the loan is disbursed the loan value might go up and down keeping in line with the market conditions. This feature can make these loans unpredictable. Interest on loans on fixed deposits depends on the interest earned it is usually two percent higher than what the bank pays the depositor.

 

No Stress about the Credit Rating:

So in case you are need of funds for some personal requirement or an emergency then the personal loan is most preferred option. For getting a personal loan one would have to meet the eligibility criteria set by the borrower and also have a healthy credit rating. In case of a low score one can also go for a personal loan with a low CIBIL Score but that is an option that is highly avoidable. Personal loans are expensive and a low score means getting them even at a higher than usual rate which could make the loan very expensive. A low score also means that you are as it is not in a healthy credit space and an additional burden could mean trouble. In such a situation a gold loan could benefit you. The borrower simply uses an asset that is available with him/her and makes the asset work for him/her by using the funds borrowed against an asset already owned by him. The risk as well the burden is low in these loans.

 

Flexibility in Borrowing:

Depending on what your requirements are and the LTV ratio you can decide how much gold to pledge for the loan. Loan to Value Ratio (LTV) is the amount of loan the bank will extend as a proportion to the value of the asset (gold). Thus based on this and how much money you need you could decide to pledge to requisite amount of gold. This means you do not have to mortgage all your gold and could borrow almost the exact amount as per your requirement.

 

Thus when you use gold to borrow money you are essentially using an unproductive asset to generate liquidity when required. Rather than letting it lie in your cupboard or a bank locker you could use you gold in times of need. Plus with so many schemes being introduced and changing attitudes the stigma against mortgaging your gold has to a large extent diminished contributing to the popularity of gold loans.

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