Things to keep in mind before opting for gold loan

Gold loan has emerged as one of the most popular mode of securing quick finance. As most Indian households keep a sizeable amount of their net worth in the form of gold, gold loan has become a perfect tool for monetizing their idle gold for meeting business or personal requirements. If you too are planning to avail gold loan, keep these following points in your mind while choosing your lender.

Loan amount: Being a secured loan, your gold loan amount would primarily depend on the valuation of gold deposited as collateral. Remember that RBI has capped loan-to-value (LTV) ratio for gold loans at 75% of gold pawned. At present, lenders are ready to lend anywhere from just Rs 1,000 to Rs 10 crore. Some lenders are also open to sanction higher loan amount as they have explicitly stayed away from putting any upper cap on the loan amount.

Interest rates: Interest rates of gold vary widely across lenders, depending on the loan amount, LTV ratio, loan tenure and other risk assessment criteria used by the lenders. For example, as higher LTV ratio entails higher risk for the lender, they charge higher interest rates to compensate for higher risk of such loans. Currently, the interest rates for gold loans can range anywhere from 9.45% p.a. to as high as 26% p.a. Thus, compare gold loan rates with other loan options, both secured and unsecured, before applying for gold loan.

Charges: Gold loans have one of the lowest processing fee among all loan options. Currently, most lenders charge 1% or lower of the loan amount as their processing fee. Also, most lenders do not penalize prepayment of gold loans. Even those penalizing pre-payments do not charge beyond 1% of the loan amount.

Loan disbursal time:  Gold loans probably have the fastest disbursal process among all non-digital loans. These loans require minimal documentation and are usually disbursed within the few hours of making loan application. This feature makes gold loans as one the best way to deal with financial emergencies.

Loan tenure and repayment mode: Lenders usually extend flexible tenure for gold loan, ranging anywhere from just 7 days to 3 years. They also offer alternative repayment options in addition to the usual EMI mode. Borrowers can choose to repay the principal and/or interest components at the end of the loan tenure or repay the entire interest component upfront and principal later at the end of the tenure. Opt for the one that suits your cash flows. For example, EMI option will suit salaried consumers because of the certainty of their income whereas the non-EMI options will suit those lacking uniform cash flows, such as self-employed people.

Gold’s purity and valuation- The type and purity of gold intended to be pledged is one of the major factor determining the loan amount. Lenders evaluate gold either through in-house valuation setup or through third-party valuators in the absence of the former. Lenders usually accept gold ornaments, coins and jewelry (necklace, bracelets, rings etc.) as collateral.

Final word: Gold loans outscore alternative loan options due to their fast disbursal and flexible repayment options. Being an asset-backed loan, lenders do not consider credit scores while approving gold loan. This makes them a perfect option for those with poor or no credit history. However, those employed with reputed organisations and having excellent credit profile may find personal loans cheaper. Thus, ensure to visit online lending marketplaces to compare various gold loan options and other loan categories, such as personal loan, loan against securities, etc before making a gold loan application.

-By Gaurav Aggarwal, Associate Director, Unsecured Loans, Paisabazaar.com