India is a country that is in love with the shiny yellow metal; gold. We Indians love to buy gold on various occasions, be it the birth of a child, a wedding or on festivals like Diwali and Akshaya Tritiya. Thus, it is likely that each household will have some amount of this precious metal which can come to their aid in times of need. As the name suggests gold loan is a loan that is given against gold which is used as collateral. Taking gold loan has its own benefits and drawbacks which we discuss here apart from the process involved in getting gold loans.
Gold Loans In India:
Almost all leading banks and various other NBFCs provide the option of taking a loan against gold. This is a secured loan that is given against gold ornaments, jewellery and gold coins based on the market value of the gold. The lender maintains some margin and the rest is disbursed as loan to the borrower. Thus if the value of the gold ornaments is Rs. 10,000 and the lender maintains a margin of 20% then the borrower can get Rs. 8000 as loan. Most lenders offer the facility of giving you an instant loan or they provide the loan the same day, which means you can have access to funds immediately when required. Most of the lenders do not charge any pre-payment penalty and processing fee but some may do so, thus one must check these aspects before applying for a loan.
Lenders also offer flexibility in repayment options which means one can repay the amount in monthly installments or pay the interest monthly and pay the principal at the end of the term or repay the entire amount at the end of the term. The borrower needs to provide a valid identity and address proof along with the Aadhar Card and the PAN card depending on the lender’s policies. Lenders do not seek to check the applicant’s CIBIL Rating before sanctioning these loans however some may have a minimum age criteria for the applicant.
Advantages of a Gold Loan:
Gold loans have some advantages over other sources of funding when someone requires funds for miscellaneous requirements.
- Processing of gold loans is fast and the borrower can get funds immediately or within hours.
- The borrower can choose to repay only the interest during the loan tenure and may pay the principal at the end of the term which gives flexibility to the borrower.
- No income proof or credit check requirement for getting the loan sanctioned. As the gold serves as collateral the lenders are not worried about the safety of their funds.
- When compared to personal loan interest rate the gold loans are available at much better rates which makes them cheaper than the most popular source of funding when money is required for miscellaneous uses.
Disadvantages of Gold Loans:
Every coin has two sides; there are certain disadvantages to taking a gold loan too which we describe here briefly.
- Gold generally carries a lot if emotional value with it, thus parting with it may not come easy to the owner. There are occasions when one would like to wear their ornaments and if they are lying mortgaged in a bank then it might not be possible to do so.
- Pledging gold for funds make sense only if the margin of safety that the bank keeps is reasonable else taking the loan may not make economic sense.
- The flexibility of repaying just interest during the loan tenure may have its drawbacks also as the borrower may find themselves overwhelmed at the end of the term and may find it difficult to repay the principal. In other loans the EMIs have the interest and the principal component, thus there is more discipline approach to repayment.
So hope the above discussion gave you a valuable peek in the world of gold loans!