How Does a Gold Loan Work?

Gold, India's most cherished precious metal, has a market value enjoying an upswing of more than 30% of its historical price since 2019. According to KPMG, a Dutch financial consulting firm, gold loans account for 5.5% of India's total gold household holdings.

The Indian Love for Gold

V.P. Nandakumar, the Managing Director and CEO of one of India's largest non-banking financial companies, says that gold loans are better than most types of unsecured loans, personal loans, and even secured loans. Indians have a traditional affinity for pledged gold jewelry, which means they're more likely to pay back their loans regardless of their renewal fees and interest rates.

With billions of rupees going into financial institutions like private banks and nationalized services from their parents, millennials and Zoomers now seem more curious about how gold loans work. They wonder if their gold ornaments can lead to a secured loan with affordable interest rates or if a personal loan can help them pay their electricity bill.
In this article, you'll learn about the financial requirements for a loan application, what you need to get the maximum amount you can borrow, and the best interest rate.

Who Can Get a Gold Loan?

Thanks to India's long and colorful history with gold ornaments, bullion, and currency, nearly anyone who owns gold jewelry, coins, bars, and ornaments can apply for a gold loan. The terms "gold loan" and "jewelry loan" are synonymous in the eyes of most banks and financial institutions. Today, thousands of Indians use their proceeds from a gold loan to fund their child's education, handle car payments, and make good on things as simple as a telephone bill.

A 2019 study from KPMG reveals that 65% of India's gold loan market belongs to unorganized lenders who can offer people a more competitive loan amount, waive nearly every processing fee, and offer a better loan to value ratio. However, most gold loans are secured by billion-rupee insurance firms in nationalized institutions, so you're less likely to lose your gold from bankruptcies and recessions.

The Gold Loan Eligibility Criteria

You may find getting a gold loan easy as you don't need a good credit score. Most lenders won't change the gold loan amount available to you depending on your profession, annual income, and total savings. However, they will require a few know-your-customer or KYC documents to start the lending process.

Lenders need to know whether you pass the eligibility criteria for a gold loan. Their standards include:
> You must be a legal Indian citizen
> You must be over 18 and under 70, with a few exceptions
> You need some form of gainful employment
> You need a gold item over 18 karats

If you do not meet the age requirement (under 18 or over 70), some gold loan providers will require you to get a co-borrower, especially if you want a high loan amount. This means you'll have to share access to the entire loan with someone else.

What Documents to Present at a Gold Loan Application

Once you meet the standards of the gold loan eligibility criteria, banks, NFCS, and private lenders will require the following KYC documents:

> An identity proof, such as a passport, PAN card, voter's ID, or driver's license

> An address proof, such as rental agreements, utility bills, and license cards

> Some income proof, such as Form F-16s or salary slips and bank statements from the past three months

> Signature proof, meaning you must sign a copy of your documents to account for their legality, accuracy, and truthfulness

Your Experience May Vary

Your experience with gold loan providers may vary from lender to lender as some banks and NBFCs won't ask to see any proof of income at all. However, you need to submit your PAN card if you make more than five lakhs per year. Some applicants also report lenders asking them for income tax returns for gold loan amounts exceeding 25 lakhs.

How Will Lenders Evaluate Your Gold?

Lenders determine the amount of money they'll let you borrow by appraising the market value of the gold items you have as collateral. Your gold's purity will play a big part in either boosting or decreasing the principal amount of your loan.

What's in a Karat?

Most gold accessories have comparatively lesser purities than 24k and 22k bullion bars and coins. The total cost of your gold item will depend on the ratio of its gold content to other metal alloys, a certain percentage that jewelers refer to as karats. According to Knot's 2019 Real Weddings Study, about 50% of all wedding rings have only one to two karats of gold, making them comparatively cheaper than other gold accessories like bracelets and brooches.

After a lender evaluates your gold item, they will ask for your KYC documents. Then finally, they will inform you of the interest charged on your loan, which will typically range from 7.5% to 12%.

Types of Gold Items Lenders Accept

Most gold loan providers will accept a minimum purity of 18 karats, which means your gold item must have 75% gold content or higher. Other lenders may offer a gold loan to people who have 16 and 12 karat gold items. However, their rate of interest could be significantly higher, and their repayment options much more limited.

The average gold loan tenure ranges from six to 24 months. Most people repay six-month gold loans in one lump sum. Customers more comfortable with a higher rate of interest and paying in installments often opt for 24-month loans.

Lenders Go the Extra Mile

If you don't have time to apply for a loan in person, you can get one online or request a doorstep evaluation from an NBFC. A company executive will visit your home and evaluate your jewelry while discussing the gold loan repayment terms available to you.

What Charges Do I Have to Pay to Get a Gold Loan?

The charges and duties you'll have to pay for a gold loan will depend on your region in India. For example, if you want a gold loan from Manappuram and you live in Rajasthan State, you'll have to pay 0.1% of your pledge value as stamp duty. Places like Karnataka State and Maharashtra seem more forgiving with service tax and other additional charges.

Most institutions also charge a variable processing fee that can change with your total gold loan amount. After settling a loan, NBFCs like ICICI Bank will take 1% of your loan amount as a processing charge, while others like Mannapuram take ten rupees by default. If you want to repledge jewelry for a new loan, you'll have to agree to a new lock-in period and pay a percentage of your new loan value as an origination fee.

A Complete List of Charges

Here is a list of fees you'll have to pay, which may vary according to your region and lending institution:
> Postage charges
> Statement of accounts
> Delivery of gold against lost pawn ticket
> Advertisement Charge-Auction intimation
> Custody Charge for Nil Balance Accounts

Collateral Limitations

Most gold loan providers in India will only accept up to 50 grams of gold, so these fees should never exceed a few thousand rupees. Some institutions will waive these charges and include them in your gold loan interest rate, so do your research before having your gold pledged.

Is It Advisable to Get a Gold Loan?

Whenever people need to find capital for a new car, home, or business venture, they think of all the things they own that banks may accept as collateral. In most Western countries, you can get personal loans by having a good credit score and an asset or two with an appreciating market value. In India, people have more options at their fingertips as gold loan lenders and nationalized banks compete for the wallet share of the middle and upper-class professionals that can apply for a gold loan.

If you're still curious about whether you can get secured loans with the gold ornaments in your possession, try looking into some of India's century-old lending institutions. Wise borrowers must always do their due diligence.

Disclaimer: No Deccan Chronicle journalist was involved in creating this content. The group also takes no responsibility for this content.