Borrowing gold as collateral has been a long-standing practice in our country. Previously, individuals mainly relied on private moneylenders to keep their gold and obtain loans.
Nowadays, banks readily offer loans against gold during their working hours. Unlike most loans, which consider factors such as credit score and the borrower’s financial ability to repay, gold loans do not require such considerations.
Some banks even provide gold loans within just 45 minutes, making them the most accessible type. However, before applying for a gold loan, there are a few things to consider.
Loan for any need: Unlike other types of loans, which are specific to particular purposes such as home, education, or vehicle, gold loans can be used for any need.
This makes them useful for various expenses, including paying off debts, medical expenses, business costs, and essential family celebrations. Compared to other types of loans, the eligibility and criteria for gold loans are more straightforward.
Interest rate and tenure: Gold loans generally have lower interest rates than other loans. However, borrowers should carefully compare offers from different banks and NBFCs.
Some leading public sector banks offer these loans starting at 8.80%. Depending on the amount of gold pledged as collateral, banks provide loans ranging from Rs.1500 to Rs.1.50 crore, with repayment periods ranging from 3 months to 4 years. Interest rates, total loan approval, and EMI tenure vary from bank to bank.
Loan percentage: The amount of loan sanctioned depends on the purity of the gold, which must be between 18 and 24 carats.
The loan amount is typically up to 70% of the gold’s value, and banks determine the loan amount based on the current price of gold. Applicants need to provide their PAN card and Aadhaar card as personal proof.
Repayment options: Many banks offer EMI options for gold loans, where the principal and interest can be paid in equal installments over a few months. This is beneficial for employees.
There’s also a facility for those who cannot pay EMI monthly, such as farmers and seasonal traders, to pay the principal and interest together at maturity.
Some banks offer an overdraft facility, where borrowers only pay interest on the amount utilized from a separate account. There are no charges for prepayment of gold loans, and some lending institutions allow a portion of the gold collateral to be reclaimed after a fixed amount is paid.
Defaulting on the loan: In case of payment default, the bank issues a notice and then auctions the gold. In such situations, choosing a loan company that provides a bit more time to pay off the dues is advisable. It’s also possible to request the bank to reschedule the loan.
Safety of collateral gold: When you pledge gold as collateral for a loan, it’s essential to ensure that the bank or financial institution stores it securely.
Credit institutions should have insurance and robust systems to prevent incidents like robbery, fire, or acts of sedition. Additionally, they should comply with RBI regulations and rules to ensure the safety of the pledged gold.
Concerns about lending institutions: The RBI has identified some that use illegal methods, including flaws in using third parties to issue loans and a lack of transparency during jewelry auctions in case of loan defaults.
To avoid potential losses, choosing financial institutions that strictly follow the Reserve Bank of India guidelines is best.