Are Gold Loans the right choice in the current Financial crisis?
The Market dynamics have been changing and it can be witnessed in the current scenario. We mentioned Gold Loans as an option to meet short term emergency fund requirement and this has seen a huge surge in recent times. Today, the Gold Loan companies are on a disbursing spree, their stocks have seen significant jump even in this COVID era. Various banks, that were sluggish in lending gold loans, are now setting up Gold loan divisions, even in their semi-urban and rural branches. In a nutshell, today Nationalized banks and NBFC’s are gunning to make Gold Loans as their key offerings.
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Why are Gold loans trending in the Financial sector in 2020?
Gold has a special place in Indian society. It is an asset viewed both as an adornment and an investment.
In a report, it was stated that more than 20,000 tonnes of gold is lying ideal in Indian households and rural India has a huge percentage of this gold.
This quantum suffices why Gold loans have surged in the last few months. People need cash right now, monetizing this ideal-sitting asset has sailed many through these trying circumstances.
Till the last decade, it was also seen as an asset of last resort for rural India to raise sales & raise money for their emergency needs. But beginning the 2000’s, it has gradually become the first choice to borrow money quickly, conveniently, through a formal network of Banks, NBFC widespread across length & breadth of our country.
Related Read: Reasons why you need Emergency Fund?
What are Gold Loans?
Gold loan is taking a loan against gold that you have in your kitty. It is a secured loan, as the lender gives the loan to the borrower collecting physical gold as collateral that the lender possesses. The loan amount that is disbursed is usually a certain percentage of your Gold’s value (75-90%).
In simple terms, you take your gold articles to the lender, along with the set of documents (Basic KYC docs). The lender, which can be a bank or NBFC, then evaluates the value of the gold, along with document verification. According to the Gold valuation, a certain loan is sanctioned to the borrower (continue reading to know the process of calculating the Loan amount). As per the tenure, you pay the interest and the principal amount and once the dues are cleared, you are free to take your gold back.
Many decades ago, this was a very informal and unstructured channel, wherein the traditional Money lenders used to charge exceptionally high-interest rates (with no paperwork), and hence Gold loan was always the last option to be explored in case of any emergency.
But now, this sector is being regulated formally by RBI. Advances against Gold bars/ornaments are in line with the set formal policy.
What are the benefits of Gold Loans?
1. Low-Interest rates:
Since Gold Loan is a secured loan (against your Gold), hence the Interest rate levied is lower compared to other Personal loans. The average Interest rate can be considered somewhere around 10%, however, this Interest rate varies between Banks and NBFC’s. Interest rate also depends upon your Loan amount, gold loan repayment tenure, borrowers paying capacity, and more.
2. Less documentation:
An ID and address proof are required for verification. While Income proofs are not asked by every bank/NBFC, which can be a boon for housewives, few lenders might ask for the proof, depending upon your Gold loan.
3. Faster Processing:
Since these are secured loans and do not require credit scoring, lenders disburse this loan within few hours. There is a facility for Online Gold loans as well in which you can get the loan amount within few minutes.
4. Low/NIL Processing Fees:
Many banks and NBFC’s levy Zero or very low Processing fee on Gold loans.
5. Regulated channel:
Now, every PSU Bank and well established NBFC disburses Gold loan, hence it is one of the safest options when you are in dire need of cash.
6. Credit scoring:
Gold loan approval doesn’t consider the borrower’s credit score (since it is a secured loan).
Who is eligible to apply for a Gold loan? The answer to this is, any Indian resident, (professional, housewives, farmers) above 18years can avail Gold loan.
8. Ease of Repayment:
One of the very common questions that come is How can the Gold loan be repaid? While the most common method is to pay the monthly interest amount, while the principal amount can be paid at the end of the loan tenure. But you also have the flexibility to pay the Interest+ principal component of your loan in the form of EMI.
Further, you have the flexibility to prepay your gold loan before the tenure ends. Most of the lenders might not levy any foreclosure charges but a few banks and NBFC’s do charge for prepayment, basis your outstanding principal amount.
What is the tenure of Gold Loan?
Gold loans are to meet your short-medium emergency requirement. Hence Gold loan tenures are usually short and mostly they range from a few months to 12months. But there are few lenders, who disburse the loan even for 36 months. But you have the flexibility to renew your loan and extend the tenure.
How do the lenders determine the gold loan amount? What is the loan-to-value ratio?
No lender lends 100% of the Gold value as the loan amount. So when you submit your gold for the loan, lenders evaluate the gold purity and weight. Based on this, the market value of gold is determined (basis the current rate). According to this market value, the lenders offer a gold loan. Usually, the lenders offer a loan with a value of up to 75% of the current market value of your gold. This is known as LTV Ratio (Loan-to-value Ratio).
Citing an example, if the value of your gold is Rs 2 lakh, then the gold loan that will be sanctioned will be around Rs1,50,000 (an average calculation). It could be somewhat lower also, as per the lender.
Things to keep in mind before opting for Gold Loan:
- Since the tenure of Gold Loan is short, hence you need to evaluate your repayment capacity. You need to pay your interest and principal on time, if you default the loan repayment as per the loan tenure, then you may lose your gold, as the lender is free to recover the loan amount by auctioning your pledged gold. You can compare lender’s rates and fees from reputed sites like Paisa Bazaar.
- Always compare the LTV ratio, Interest rate, processing fee, Foreclosure charges, penalty (in case of default) to arrive at your total cost of a gold loan.
- Take Gold loans from credible, authorized lenders, via the organized channels, as you are entrusting your precious metal with them. Prefer to take Gold loans from Nationalized banks or reputed NBFC’s, rather than cooperative societies, that are not well-regulated.
In nutshell, You can opt for gold loans if you have immediate financial urgency, due to faster processing and lesser interest rates.
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Love and Light,
Disclaimer: These are solely the opinions of the author. Though the information is well researched and true to the best of author’s knowledge, it cannot be a substitute for professional advice. This post does not guarantee or promises regarding the accuracy, reliability or completeness of the information presented. The information presented is only for informational purposes and shouldn’t be seen as any kind of advice. Always refer to your Financial Advisor for financial advice.