The Buyt Desk
When in emergency, Gold loan is the quickest option as you will receive money in just a few hours. But it has a few drawbacks. Let us look into its pros and cons.
Gold loan is the Loan you get against your Gold. As Indians have gold ornaments lying idle in safe deposits, they can go for gold loans to generate some funds. It is considered as the quickest secured loan in an emergency situation. You need to vouch your gold ornaments or coins minted by banks with your loan lender to get immediate money. The loan offered is usually 75% of the vouched gold value. You will get back all your gold ornaments and coins you have pledged after complete repayment of the loan. Various banks and Non-Banking Financial Company (NBFC) provide gold loans. You can avail this facility by walking in to their bank/office or by registering through their websites or mobile app.
What is the Gold Loan process followed by Banks and NBFCs?
There are few steps that lenders follow prior to the disbursal of a gold loan-
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Gold submission – Once you apply for a loan with the lender (online or offline), the lender collects the gold from you. You need to submit your gold articles that you are going to pledge to the concerned person. If it is an online application, lenders will come to your doorstep to collect articles and if offline application then you need to bring the gold to your lender.
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Gold evaluation – The lender evaluates the overall value of your gold (excluding stones and beads in the ornament) as per the current market value. Based on the value of gold alone, the loan amount is decided. It can be anywhere between 75% – 85% of the total gold value.
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Documentation process – You need to submit a few documents with your application form. This is hassle free as it needs very minimal documents like passport-sized photographs, identity proof and address proof.
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Authentication and loan disbursal – The lender authenticates the documents submitted by you. Once approved the loan amount will be disbursed to your bank account.
What are the advantages of opting for a gold loan?
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Faster processing – Gold loans neither have strict eligibility criteria nor heavy documentation. This makes it easy for lenders to disburse the loan amount in just a few hours.
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Lower interest rate – Gold loans charge a lower rate of interest as compared to personal loans. And if you go for collateral security then the interest rate will be lowered further.
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Flexibility in repayment – You can choose from any four repayment methods
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EMI method – Monthly you pay a part of principal and interest.
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Doing interest payments Quarterly/ Semi-yearly/ Yearly and paying the principal amount at the end of the tenure.
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Doing upfront total interest payment and paying the principal amount at the end of the tenure.
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Bullet repayment is where at the end of tenure you pay both principal and interest amount.
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Income proof is not needed for approval of a loan.
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The credit score is not needed for approval of the loan.
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Zero processing fees – Most of the banks and NBFCs do not charge processing fees on gold loans and some charge a maximum of 1%.
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No foreclosure charges – Banks and NBFCs don’t impose any pre-payment charges or charge 1% as prepayment penalty.
What are the disadvantages of opting for a gold loan?
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Lower Loan-to-Value Ratio – This value is lesser for gold loans. Maximum of 90% of the value of the gold value is loan amount. And this is an ideal condition if you are a valued customer to banks else it can be as less as 65% or max 85%.
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You can lose your gold – If you are unable to repay the loan amount with interest within the tenure, lenders are legally allowed to freeze your pledged gold and auction it. The excess amount after settling the outstanding gold loan amount is returned to you.
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Impact on CIBIL score- When you miss your repayments, your CIBIL score will go down. If you are on time then your rating will go up on credit score.
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Only for short tenures – The repayment of gold loans tenure is usually a year or maximum 3 years if it is a big amount.
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The approved gold loan amount is directly proportional to the weight and purity of pledged gold – Gold below 18k of purity is not accepted even if it has precious stones like diamond.
