Many people in India lost their employment or had their salaries cut drastically in the pandemic. The increasing uncertainty due to the global pandemic also led to an increased risk aversion among lenders to extend credit in the form of personal loans or other forms of unsecured credit.
Now, many Indians have resorted to pawning their household gold in lieu of emergency cash to fund their expenses. Practically, every household in India owns gold in the form of jewellery, and despite the social stigma associated with pawning family heirlooms in exchange for credit, it is often seen as a last resort towards raising cash, be it for livelihood, or emergency medical expenses.
Gold loans are among the easiest of ways to raise credit, as they are considered a secured loan, unlike a personal loan, which is unsecured. One can approach a bank or a jewellery store and get a loan of up to 75 per cent of the value of the holding, based on the current price of gold.
Also, when banks and lending institutions would be unwilling to extend unsecured loans because of fear that they could turn bad, they are unlikely to refuse a gold loan.
That said, as with any other loan, here are a few things you should know before taking a gold loan, so that you get the maximum out of your gold loan and are able to pay back the loan in due time, and get your gold back.
Bank or NBFC
While there are jewellers and small-time lenders who could be willing to dole out gold loans, but ideally, you should always choose a bank or a non-banking financial institution (NBFC), as they are much safer.
“Both banks and NBFCs provide gold loans, but it’s important to examine their rates, eligibility restrictions, and the loan amounts. Most banks, for example, impose a valuation and processing fee of 1-2 per cent on the loan amount, whereas NBFCs do not,” says Renisha Chainani, head of research, Augmont Gold For All, an integrated gold player.
That said, you could also consider an NBFC, because some of them specialise in gold loans, and also offer lower interest rates and better terms and conditions.
Valuation Of Gold
The quality or value of gold plays an important part in determining the loan amount. Hence, the purer the gold, the greater will be the valuation, and consequently, the loan amount. In fact, the gold must be of 18-24 carats, to be eligible for a loan. Also, the value gets deducted, if you want to take a loan against a gold jewellery set with stones. Only the actual gold gets considered for a loan.
“As a gold loan is secured, the loan amount is based on the value of the gold you deposit as collateral. NBFCs can only lend up to 60 per cent LTV (loan to value) at the moment, but banks can lend up to 75 per cent LTV,” says Chainani.
A 60 per cent LTV means that if your gold is valued at Rs 1 lakh, you will get a loan amount of Rs 60,000.
Since the interest rate on a gold loan is decided by the lender’s risk assessment, it can range from 7-25 per cent per annum. Lenders use LTV ratio, loan tenure, loan amount, and other parameters to establish the interest rate on gold loans.
Gold loans are short-term loans with repayment terms ranging from seven days to three years, and offer a variety of repayment choices.
When choosing the tenure, one must plan it in such a way that he/she is confident of paying back the loan within that period. A longer tenure means one has to pay higher interest.
For repayment options, there are several alternatives available to borrowers, such as regular EMIs, bullet payments, and partial payments. In case of a bullet loan, the loan repayment is considered as monthly, but one has to pay the entire loan amount at maturity.
This can be an option, if one expects his/her finances to pick up at the time when he/she needs to repay. One can choose the repayment option that suits him/her the best. One should also keep in mind the processing fees and other charges.
Taking a gold loan has now become much hassle-free than before. Many banks and NBFC have also started doorstep delivery of gold loans in the last few years, where they inspect and value the gold at the borrower’s place and disburse the loan in a few hours.