Top 3 Gold Loan Options
Gold Loan is prominent in India since the last decade especially in the southern part of the country where gold jewellery is taken as a sign of self-esteem and power. This type of loan is provided by both the scheduled commercial banks and non-banking financial companies (NBFCs). This was quite prominent in the erstwhile generation as well.
Gold products that qualify for loan from banks / NBFCs
- Gold jewellery upto the purity of 18 carat
- Specially minted coins of banks with weight of less than 50 grams (not accepted by NBFCs)
Products that do not qualify for gold loan
- Gold exchange traded funds (ETFs)
- Gold bars
- Gold Coins with weight more than 50 grams
Loan to value ratio (LTV):
LTV is the proportion of loan granted in comparison to the value of gold mortgaged by the borrower. LTV calculation is based on 30 day average price of 22 carat gold at Bombay bullion market. The Reserve Bank of India (RBI) has mandated the financial intuitions to follow maximum LTV ratio of 75% i.e. jeweler of Rs. 1 lakh would get a loan of upto Rs. 75,000. Usually lower the LTV the lower the banks and NBFCs would charge interest.
Personal Loan v/s Gold Loan:
- Rate of interest: Even though gold loan is secured the banks and NBFCs charge a higher rate of interest in comparison to unsecured personal loan. With interest rate slightly higher than personal loan the gold loan market especially the gold loan from NBFCs which caters to the cash requirement unorganized sector i.e. the non salaried class, temporary employees etc.
- Documentation: In contrast to personal loan, gold loan requires really less documentation and thereby less processing time. It is really quick and hassle free.
- Prepayment charges: Gold loan from NBFCs do not have any penalty for prepayment as these loans can be repaid not only traditionally through the equated monthly installment (EMI) format but also through bullet repayment and overdraft facility. Banks providing gold loans do have some nominal charges for early repayment; however as distinguished from NBFCs they provide loans for longer period.
- Processing charges: The charges for processing a personal loan could range from anywhere between Rs. 2,000 to Rs. 20,000; however these charges are nil or negligible in gold loan. Banks providing gold loan do charge a nominal fee for valuation of gold, whereas NBFCs do not charge any money.
- Specified purpose: Personal loan can be utilized to trade / invest in the stock market. The gold loan from bank is usually earmarked for a particular purpose and usage of it for any other purpose is unauthorized. Gold loan from NBFCs like in the case of personal loan can be utilized for any activity.
Nevertheless both gold loan and personal loan have their own importance. The main question lies when should one opt for a Gold loan as against a personal loan?
- One has gold ornaments to be pledged and they do not wish to wear it
- Urgency of funds requirement is within a day or couple of hours
- The borrower believes that he / she can repay the same within a couple of years
- Personal loan requires a credit rating. Therefore customers with poor CIBIL rating could go for gold loan and improve their score
As gold loan have nil to negligible processing fees and prepayment charges, gold loan reduces the all inclusive cost of borrowing.
