5 Myths about gold loans you shouldn't believe

There are many misconceptions associated with gold loans. This article busts myths you have in your mind regarding gold loans

5 Myths about gold loans you shouldn't believe

The year 1991 saw India being brought to its knees by crippling strikes from three quarters. First, the biggest buyer of Indian goods – the Soviet Union – was in the middle of breaking into splinters, drying up a key income stream. Second, the Gulf war broke out between two of India’s bigger oil suppliers (Iraq and Kuwait), an event that further froze New Delhi’s credit lines even as global oil prices spiralled. The final straw was overseas investors pulling out of India because of political upheavals within the country.

Squeezed in from all sides, the then government discovered it was left with just enough in the kitty to sustain about three weeks of imports. Faced with no other option, it pledged 67 tonnes of gold with the IMF for a loan of $3.9 billion. A huge sum for India back then, the inflow of fresh funds helped the government tackle the crisis.

What Indian policymakers did three decades ago was follow a basic, everyday financial advice: rather than keep gold as a dead asset, utilise its worth during an emergency by taking out a loan on its strength. It is an axiomatic truth that Indians have banked on for generations – from raising funds for a humble family wedding to raising working capital for seeing through a stalled real estate project; it is called a ‘gold loan’. 

Taking a loan against the precious metal is a very long tradition in India, and shorn of frills, it was exactly this route that the Indian government had taken in 1991.

Related: 3 Gold schemes offered by jewellers and how they work 

What is a gold loan?

A gold loan is essentially a loan you take by pledging any family jewellery you possess; like the Indian government in 1991, you too can obtain a gold loan from a bank or a non-banking finance company (NBFC), as long as the gold pledged has a purity of 18-24 carat.

In the case of banks, one can pledge gold ornaments or specially-minted gold coins sold by banks; however, loans cannot be given for gold coins weighing more than 50 gram. With NBFCs, only gold jewellery can be pledged. Also, loans cannot be given for the purchase of gold in any form. 

The biggest upside is that the loan is processed within an hour as gold is highly liquid, which comes in handy during emergencies. But then again, if it were not an emergency, why would you pledge your gold? 

Related: Everything you need to know about Gold Monetization Scheme 

Do not believe these myths


The only downside to a gold loan is that if you fail to repay the amount in the stipulated period, the lender can auction off the pledged jewellery to recover the loan amount. But this is true of any collateral that comes with any loan. 

Related: Buying gold? 5 things to check before you buy 

Busting some myths

As stated earlier, loan against gold is a time-honoured tradition in India. Yet, when it comes to using the family jewellery to raise money, even during a crisis, many people are hesitant. First, there is the intrinsic reluctance to ‘part’ with something that Indians consider auspicious. Then there are the misconceptions over the concept and working of gold loans. 

If you are one of those who believe gold loans are unsafe, let us address the issues that could be bothering you and see if we can dispel your doubts.

MYTH 1: Only jewellers can offer gold loans

Needless to say, this is the biggest misconception of them all. As stated earlier, banks (even state-owned ones) and NBFCs offer easy gold loans; in fact, there are NBFCs that offer only gold loans. Also, there are specific government rules regarding these loans, so everything is legitimate and above board. Get over the mindset that only the neighbourhood jeweller can offer you a gold loan; why not approach your local bank – or an NBFC if there is one?

MYTH 2: Your gold may get swapped or misplaced

Once again, this is highly far-fetched. An itinerant moneylender may replace your ornaments with fake lookalikes, but not licensed banks and NBFCs. Your gold is absolutely safe with them, as it is kept in a vault in a strongroom with security arrangements, which guarantees the safety of your valued possession. You can have total peace of mind. When you repay the loan and wish to get your gold back, you will get it in exactly the same state as you gave it.

MYTH 3: Gold loans come with high interest rates

On the contrary, gold loan comes with very moderate rates, sometimes even competitive rates, as it is a secured type of loan, which usually has comparatively low-interest rates. While it varies from bank to bank, the charge is 11-17% annually along with a processing fee of 1-2%. NBFCs charge around 15-26% in spite of having a lower loan-to-value ratio (the amount of loan amount that the lender is willing to release against the value of the pledged item). 

However, the interest rate is often influenced by the borrower’s profile. Compared to this, personal loans from PSUs and private sector banks as well as NBFCs can vary from 11% to as high as 28%.

Related: What is the difference between E-gold and gold ETFs? 

MYTH 4: Traditional jewellery is not accepted 

Clearly, this is not true. The government has clear-cut rules about what kind of gold items can be pledged to get a gold loan, and it mentions ‘jewellery’, not ‘modern jewellery’. Many think banks and NBFCs offer gold loans only on new and latest gold ornaments. But who defines modern jewellery or modern design? The rules and regulations on gold loans don’t. 

So let us be clear: banks do offer loans on old gold ornaments, they only look for the purity of the pledged gold, which has to be of at least 18 karat standard.

Related: Real estate vs Gold 

MYTH 5: The procedure is time-consuming

This is perhaps the most laughable myth of all, as a gold loan is the only loan you can get on the spot. In fact banks and NBFCs approve gold loans and disburse the amount the same day, in some cases within an hour, provided they are satisfied with your credit profile and the purity of the gold you are pledging. 

X myths about Gold loan


Last words

If you are in need of immediate funds, you should definitely consider getting a gold loan. Take your jewellery to any branch of any bank or NBFC offering gold loans and get a loan for any value instantly. With simple and easy documentation, the loan can be instantly availed of across the counter. Worry not; your gold is absolutely safe – maybe even safer than it is in your own home!


 

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