Factors to consider before applying for gold loan

Since decades, gold loan has remained one of the popular borrowing options, especially for those in immediate need of finance within a short time span. Also, being an asset backed loan, lenders do not consider credit score for approving gold loan. This makes them a prudent choice for those with low or no credit profile. However, since repaying the loan has certain implications on your financial future, you must be careful when applying for it. Here are 7 factors you must consider before taking a gold loan.

Loan amount

As gold loan is secured in nature, the loan amount fundamentally depends on the valuation of gold you deposit as collateral. Note that RBI has barred banks and NBFCs from offering gold loan worth more than 75% of the gold’s value. As lenders retain margin amount, you do not receive the whole gold value as loan. Currently, lenders are sanctioning loans of up to 10 crores with Rs. 1000 being the basic lending amount. However, some lenders may also sanction higher or lower loan amount as they have clearly stayed away from mentioning any
upper or lower limit on the loan amount.

Interest rates

As the interest rate for gold loan is determined on basis of lender’s assessment of risk, it may vary anywhere between 9.24% and 26% p.a. LTV ratio, loan tenure, loan amount etc. are factors used by lenders to determine gold loan’s interest rate. For instance, as higher LTV ratio involves higher risk for lenders, they charge higher rate of interest to make up for the higher risk involved in such loans. Thus, before zeroing on a lender, make sure you compare the interest rates offered by other lenders to you.

Processing fees

Processing fee refers to the expenses incurred by lenders when processing your gold loan application. It usually range between nil and 2% of the loan amount. Some lenders also charge a flat fee. Ensure to check this fee before finalizing your loan application as in case of big-ticket loan, it may be a significant amount.

Loan disbursal time

These loans come with minimal paper work and are generally disbursed within few hours of making the loan application. This feature makes gold loan a prudent choice to deal with financial exigencies.

Loan tenure and repayment
Gold loans are short-term loans with tenure ranging anywhere between 7 days and 3 years offering flexible repayment options. Apart from the usual EMI mode of repayment, borrowers can also choose to repay the whole interest amount upfront and the principal component later at the end of the loan tenure. Though the alternative repayment option removes the need to make monthly payments of the interest component and principal, you must still opt for repayment option which suits your cash flows.

Prepayment/foreclosure charges

Most of the lenders usually charge no fee in case of prepayment of gold loan. However, there are some lenders, which may charge up to 2.25% of the outstanding amount if closed before the completion of the loan tenure. By prepaying your gold loan, you tend to save on the interest cost. Thus, if you plan to prepay your loan, ensure to choose the lender charging minimal or no prepayment/foreclosure penalty.

Purity and valuation of gold

The purity and kind of gold pledged is one of the crucial factors that determines the loan amount. Usually any kind of gold ornament, jewellery or coins can be presented as collateral. Lenders assess gold either via in house valuation setup or via third party valuators to decide the total principal amount to sanction.

(Writer Gaurav Aggarwal is Associate Director & Head of Unsecured Loans at Paisabazaar.com)