Also known as a loan against gold, the gold loan is a type of secured loan that a borrower receives by keeping his/her gold articles as collateral with a lender. These gold articles include gold ornaments and jewellery. Your loan amount will be a certain portion of the value of the collateralized gold.
After you repay the entire loan amount, you will get your jewellery back. The amount can be repaid in EMIs without hassle. Gold loans have no end-restrictions, unlike other secured loans like car loans, home loans, etc.
Things to Consider While Taking a Gold Loan
Following are the six key factors you must keep in mind before applying for a gold loan:
- Borrowing from NBFCs
It is always a safe and smart choice to take a gold loan from financial institutions or NBFCs instead of taking them from private lenders. Firstly, it is essential to know that a gold loan is a secured loan in which you have to mortgage gold ornaments or jewellery with your lender for the loan.
In addition, while checking loan offers, make sure you go for the reliable one. Thankfully non-banking financial institutions offer gold loans at affordable interest rates and low processing fees than other financial institutions.
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- Gold Valuation
Your deposited gold is the most vital thing in the entire loan process since your gold loan amount relies on the valuation of your property. When you borrow a loan against gold, your lender will consider the original price of the gold, excluding the design and additional stones attached to it.
In general, lenders accept 18 carats or 24 carats of gold as collateral. Also, the purity of gold determines the valuation, and hence, the loan amount.
Furthermore, you also should verify your lender’s loan-to-value (LTV) ratio. Usually, the LTV ratio ranges between 60 per cent and 90 per cent. For example, if the LTV is 80 per cent and the gold amount is Rs. 1,50,000, your loan amount should be Rs. 1,20,000.
- Credibility of Lender
Since many financial institutions and NBFCs offer gold loans, it is quite a challenging task to select the right lender for you. Therefore, before availing of a gold loan, make sure you choose your lenders correctly since you will be mortgaging your valuable jewellery with them.
Moreover, you need to check the customer reviews of lenders thoroughly before choosing one. Try to avoid taking gold loans from unauthorised lenders as it can end up as fraudulent.
- Interest Rate
Another vital factor you must remember while applying for a gold loan is the interest rate since it helps determine the repayment amount. Being a secured loan, gold loan offers lower interest rates than unsecured loans such as business loans, personal loans, etc. However, the interest rate of gold loan changes from one lender to another based on the nature of the gold you deposit.
Therefore, check every lender’s interest rates before applying for a loan. Generally, the interest rate ranges between 7% per annum and 15% per annum. In addition, when you borrow gold loans from financial institutions, they will charge an additional 1 to 2 percent processing charges.
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- Nature of Repayment
Another important factor you must consider while opting for a gold loan is the mode of repayment. Lenders will offer you different choices of repayment ranges that comprise equated monthly instalments (EMI). Usually, gold loans offer short-term repayment tenure that ranges from a week to a few years. You are free to choose a repayment tenure as per your affordability while taking a gold loan.
- Non-Payment
One more important factor to remember is the consequences of non-payment of a gold loan. If you fail to clear the payments on time, your lender may auction your gold property. Furthermore, if the market price of your deposited gold falls, your lender may recommend you to deposit further gold to make its value equal to the LTV ratio.
Eligibility Criteria for a Gold Loan
Following are the gold loan eligibility criteria:
- Then applicant must be an Indian citizen
- Age limit of the applicant ranges between 21 years and 70 years
- The applicant can be salaried or self-employed
Documents Required for a Gold Loan
Following are the documents required while applying for a gold loan:
- Identity Proof (includes Aadhaar card, PAN card, driving license, voter ID card, ration card)
- Address Proof (Aadhaar card, driving license, utility bill, voter ID card)
A gold loan is an ideal form of cfredit, especially when you run out of cash to meet your personal or business needs. Under such cases, you can opt for this loan. However, before applying for it, make sure that you read all of its terms and conditions carefully.