How Does Gold Loan Work? How To Get a Gold Loan?

Gold is associated with an emotional connection for Indians. In fact, India ranks No.1 whereas India doesn’t even figure in the top 10 countries by production. Since time immemorial, Indians have used gold in every important event of their lives. Indians love to hoard gold for use as ornaments during various occasions. However, most of such gold just lies idle in vaults during other days. Why not use it to fund your short term money requirement? Gold loans make this possible. Let’s discuss how gold loans work and how you can get a gold loan in today’s blog post.

What is a gold loan?

Gold loans as such aren’t new to Indians. Almost every business street in a city, town, or village has a pawnbroker who does this kind of lending against gold as security. Just that this concept has been institutionalized in the 20th century. Gold loans are secured loans that will give you loans against gold pledged by you. Gold loans can fund your urgent money requirement such as paying education fees for your children, a medical emergency, or even for your vacation!

Let’s say you are purchasing a new house and have availed of a home loan. Since the maximum Loan-to-Value(LTV) for a home loan is 80%, you may still have to arrange the balance of 20% from somewhere. During such situations too, the gold loan can be availed to sail through. This is just a practical example. Gold loans do not have an end-use restriction like in the case of home loan and vehicle loan. Hence, gold loans can be used to fund any kind of short term money requirement.

What are the requirements to get a Gold Loan?

Gold loans do not require stringent requirements from a customer, for they are secured loans. Unlike other loans where your CIBIL score decides your loan sanction probability, a Gold loan doesn’t require such a clean CIBIL credit score. So, even if your loan application is rejected by other banking and non-banking financial institutions for any other type of loan due to a bad CIBIL score, chances are that you may get a Gold loan at the same institutions. All they need is an application form, two passport size photos, a valid ID, and address proof. Most of the time you don’t need to produce purchase bills.

What is the interest rate for a gold loan?

Interest rates for a gold loan vary among different banks or NBFCs. While banks offer anywhere between 2-6% more than the rates for a home loan, NBFCs offer at interest rates 5-10% more than their home loan rates. Typically, gold loan interest rates are cheaper than that of personal loans and credit card interest rates.

How much of a gold loan can I get?

Banks and NBFCs offer home loans for as low as Rs. 7,000 to as high as over Rs. 1 crore. The amount of gold loan you get depends on the value of the gold that you pledge. When you take your gold to the bank or NBFC, they quickly evaluate the weight and purity of your gold to determine its value. In most cases, the Loan-to-Value(LTV) of the gold loan may be less than 75% of the value of the gold determined. The lender may deduct the making and impurity charges of 20-30% on the value of gold. Also, they will deduct the weight of the stones during the valuation for arriving at the value of gold.

After the valuation and arriving at the LTV, NBFCs will give you the sanctioned loan on the same day whereas banks can take 2-3 days. They may charge you loan processing charges of anywhere between 0.5%-1%. Thanks to the COVID-19 pandemic, some NBFCs have taken it to the next level by offering a gold loan at home service without needing you to step out of your home. This service is really helpful for those who are concerned about carrying physical gold to the bank.

How to repay a gold loan?

The tenure of Gold loans is typically a maximum of 4 years are less. Repayment of a gold loan is different compared to other loans such as a home loan or a personal loan. While other loans require you to pay interest + principal as EMIs, gold loans just require you to pay the interest component alone. That means if you have taken a gold loan, it is just enough that you pay the interest monthly and just pay the principal as a lump sum before the end of the loan tenure. However, this doesn’t stop you from paying off the gold loans as EMIs which will reduce your principal component monthly. Please note that there are no prepayment charges in case you decide to clear off your loan when you have sufficient money.

How safe is my gold during the gold loan?

Banks and NBFCs maintain a high level of security for your gold pledged under the gold loan. They keep your gold in vaults under 24*7 electronic surveillance. You will get back your gold once you complete the repayment of your loan. However, in case if you fail to repay the loan, the lender has the right to auction your gold to get back the loan amount. So it is important that you repay your gold loan well before the tenure.

Conclusion

A loan is not the ideal way to fund your requirement. You should have enough money as a reserve to face any emergency. In fact, maintaining an emergency fund is one of the core elements of personal finance. However, in exceptional cases where you need urgent money, a gold loan is an option to consider. So next time you buy a gold loan, be sure to read this post, understand how gold loan works, compare interest rates and compare LTVs before buying the loan.

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