Thinking of a applying for a gold loan? Read on to know the things you must know before applying for one.
Pledging gold for money is a common practice in India. People pledge their gold jewellery to pawnshops and financers to, say, arrange funds for starting a new business or to settle urgent medical bills. It is easy to get a loan against gold. Now the process has been institutionalised with banks and non-banking financial companies (NBFCs) offering gold loans.
Getting a loan against your gold is simple if you are aware of the exact process and some facts. For instance, did you know that a gold loan is the easiest and the fastest way to secure money for short-term credit? However, it is not advisable to go for a big loan against your gold since the interest rates can be pretty hefty, which could mean the interest you pay can be double the value of your gold!
Here are some important FAQs to consider before you think of applying for a gold loan.
What is a gold loan?
A gold loan is granted to you when you give gold jewellery as collateral to the lender. The amount of loan is usually a percentage amount, up to 75% of the value of the pledged gold. You are required to repay the loan in instalments. Once you repay the loan, plus the interest amount, you will get your gold back.
Nationalised banks, private banks, and NBFCs offer gold loans at affordable rates. The annual interest rate on your gold loan ranges from 13 to 16%. You can avail of a gold loan to meet a short-term credit requirement such as your child’s education, a medical emergency, a wedding in the family etc. Taking a gold loan is always preferable to selling your jewellery.
What type of gold can I pledge?
All gold valuables can be pledged for a loan. The purity of the gold will determine the loan value. For instance, coins and gold bars have more value as they come with higher purity. In case of gold jewellery studded with precious stones, only the value of the gold component is considered.
Suppose you have 20-karat gold jewellery in which 10 grams is pure gold and 4 grams is made up of silver, gems, etc. Then, at the time of evaluating the jewellery for a gold loan, the value of only 10 grams of pure gold will be considered.
Related: Will India lose interest in Gold?
How can I avail of a gold loan?
To get a gold loan, you need to take your gold asset(s) to the lender. The purity of the gold is checked and this forms the basis of the loan amount. The market value of the gold is then checked, and the loan sanctioned. As mentioned earlier, this can be up to 75% of the gold value (the maximum value of the loan as per RBI guidelines).
To put it in other words, your loan amount cannot exceed 75% of the value of your gold. The lender will then deduct the processing fee (usually up to 1 of the total loan amount), following which your loan is disbursed in cash (if it is up to Rs 20,000).
Is my gold safe with the lender?
Gold loans are now managed by professional institutions that keep your jewellery safe in a strong vault guarded under 24x7 CCTV cameras. Some lenders even insure the gold pledged to them, protecting it against theft. In case of a robbery, you will still get back an amount equivalent to the gold’s market value.
What documents will I need to submit?
You will need an identity proof (PAN and Aadhaar card copy), one address proof (electricity bill, ration card, passport, or telephone bill) and one signature proof (passport copy, driver’s license etc). Also carry two passport-sized photographs. If you don’t have a PAN card, you can submit Form 60. You may also need to supply proof of income if requested.
Who can apply for a gold loan?
Any person who is 18 years old or above can apply, as long as they have a gold asset to pledge. You could be a salaried professional, a housewife, or self-employed. Farmers too can avail of a gold loan for farm credit, agriculture infrastructure, and ancillary activities.
How long does it take to sanction a gold loan?
The process of applying for a gold loan is very simple and fast. If you have the all the necessary documents in place, you could get your loan on the same day.
What are the repayment options?
You can repay the gold loan in EMIs. You even have the option to pay the interest amount upfront and repay the principal loan amount at the end of the loan tenure.
What is the tenure of repaying the gold loan?
The loan period is usually 3-12 months. The period of repayment cannot exceed two and a half years, and the loan must be repaid within 30 months (or 36 months, depending on the lender). Some lenders offer the option to renew your loan to extend the tenure.
What happens if I don’t repay my loan on time?
Shorter loan tenure means you should be confident of repaying the loan on time. Failing to do so may cause you to lose your pledged gold. The lender has every right to sell your gold to recover the loan amount.
What are the fees and other charges involved?
There is a loan processing fee of up to 1% of the loan amount, which the borrower must pay before the loan is executed. Banks charge a processing fee while some other lenders may not.You may also need to pay a valuation charge. Some lenders have in-house valuators, in which case the valuation fee might be waived. This fee is thus specific to the lender.
Some lenders charge renewal fees based on the loan amount and stamp duty as per the state laws. Also, you may need to pay a late payment penalty depending on the lender.
In addition, your lender can charge you GST or service tax and a prepayment penalty if you clear the loan before the tenure is over. This charge differs from one lender to another, so it is important to compare costs. Some may not charge a prepayment penalty at all.
Bank or NBFC – which is better?
There are now specialised NBFCs and banks offering gold loans across cities. As per the RBI notification, both banks and NBFCs now offer a loan-to-value ratio of 75%. A quick comparison will tell you which one to go to for a gold loan:
- Banks offer gold loan at a lower rate of interest than NBFCs. Interest is even lower for public sector banks. This is so because the cost of funds in banks is lower.
- Loan disbursal is faster with NBFCs as compared to banks. An NBFC only needs your KYC document, so the documentation is less cumbersome.
- The option of paying interest during the loan tenure and the principal loan amount at the end of the tenure is available only with NBFCs.
- NBFCs do not charge a prepayment penalty.
So, if you need a gold loan at a lower interest rate, a bank should be your first priority. On the other hand, if you need a simple and speedy loan, an NBFC should be your preferred choice.
What are the advantages of taking a gold loan?
Taking a loan against your gold has many benefits:
- It is fast and easy to process. It does not require you to show any income proof or credit card history; you only need a gold asset to pledge.
- The documentation work to process a gold loan is simple; you only need to produce a few documents.
- Gold loan is offered at a lower interest rate compared to unsecured loans such as personal loans, which come with an interest rate of 15% onwards.
A word of caution
Apply for a gold loan only if you are confident of repaying in time. Otherwise, you may lose your asset as the bank or NBFC is entitled to sell your gold to recover the unpaid loan amount. It is therefore recommended that you opt for a gold loan only for short-term credit, and repay it on time so you can get your gold back.