Gold loans are one of the best ways to secure quick funding in times of financial need. All you need are your gold articles and some basic KYC documents. However, before rushing off to get a gold loan, there are some important factors you should consider. Being aware of these key things will help ensure you have a smooth and hassle-free gold loan experience.
On that note, let’s take a look at the 8 important things to know before applying for a gold loan in India.
1. How Gold Loans Work
Gold loans are secured loans where you pledge your gold jewellery as collateral to receive cash instantly. The loan amount sanctioned is a percentage of the market value of the gold you pledge. This percentage, known as the loan-to-value ratio, is usually capped at 75%, according to RBI’s guidelines.
Once you repay the loan amount plus interest in full, you get your gold back. If you are unable to repay the loan, the lending institution will auction off or sell your gold to recover their money.
Gold loan terms usually range from 1 to 12 months or more, depending on the lender’s policies. You can renew or extend your gold loan if required. Generally, the interest rates start as low as 7% per annum.
2. Factors that Determine Your Gold Loan Amount
The amount of loan you can get against your gold depends on several factors:
- Purity of gold: Gold jewellery below 18 karats will get a lower loan amount compared to 22 or 24-karat pure gold.
- Weight: The heavier the gold you pledge, the more money you can get.
- Quality: Plain gold jewellery with fewer stones and designs yields higher loan amounts than highly ornate jewellery.
- Market price of gold: The loan amount is calculated as a percentage of current gold prices. Rising gold prices mean higher loan amounts.
Before visiting lending institutions, weigh your gold and check the karats to get an estimate of the potential loan amount.
3. Additional Costs and Fees
When taking a gold loan, you pay an interest rate on the loan amount, but there can be other charges involved:
- Processing fee: Typically ranges from 1% to 5% of the loan amount as charges for appraising gold, handling documentation, etc.
- Late payment penalties: If you delay repayments, extra interest and penalties get added.
- Auction charges: If your loan defaults and gold is auctioned, you may have to pay the auction charges.
- Locker charges: Some financial institutions charge annual locker fees to store your pledged gold safely.
Factor in these charges to determine your total costs. Lending institutions must disclose all applicable fees transparently beforehand.
4. Factors that Affect Gold Loan Interest Rates
Gold loan interest rates vary from one loan provider to another, typically starting from 7%. Here are some factors that determine the interest rate you'll be charged:
- Loan amount: Higher loan amounts often have higher interest rates.
- Loan tenure: Longer loan tenures increase the total interest payable. Opt for the shortest tenure you need.
- Lending institution: Banks and NBFCs usually offer lower interest rates than other private gold loan providers.
- Relationship with a financial institution: Existing customers may get lower gold loan interest rates.
Compare interest rates across lenders before deciding where to take your gold loan.
5. Repayment Options
You have a few options to repay your gold loan. However, the bullet repayment and regular EMI options are the most common:
Bullet Repayment
You pay a monthly interest amount through the loan tenure and repay the entire principal only at maturity. This maintains your liquidity during the loan tenure, but large payments can be difficult to arrange in the end.
EMI
You pay down both interest and a portion of the principal each month through equated monthly instalments (EMIs) until the entire loan is repaid. No large lump sum payment is required at maturity. However, EMIs will reduce your monthly cash flow.
Analyse your cash flows and ability to pay before choosing the ideal repayment structure for your situation. Some loan providers may also offer part-prepayment options on gold loans.
6. Factors that Impact Your Credit Score
Gold loans affect your credit score like any other loan. Make sure you:
- Make timely repayments each month to avoid late payments being reported.
- Limit your gold loan amount relative to your income level. Overborrowing negatively impacts your credit score.
Handling your gold loan prudently can lead to a credit score boost and higher eligibility for future loans.
7. Safety of Your Gold
A major concern is whether your precious gold will remain safe until you repay the loan. Here are the steps reputable lending institutions take:
- Store pledged gold in high-security bank lockers with 24/7 CCTV monitoring.
- Offers free periodic gold valuation and certification services.
- Has transparent auction procedures in case of non-repayment.
8. Factors that Help Get a Higher Loan Amount
If you need to maximise the loan amount against your gold, consider these tips:
- Opt for plain 22 or 24 karats gold instead of 18 karats and avoid jewellery with too many stones or intricate designs.
- Clean your jewellery thoroughly before pledging to reveal its true weight and shine.
- Break up or segregate pure gold sections from weaker metal alloys in your jewellery to get a higher value.
- Take a re-valuation certificate reflecting current market gold prices to lend against.
- Add all old unused gold in your locker to combine with jewellery being pledged.
Every small measure to increase gold weight, purity and value will help boost your potential gold loan amount.
Conclusion
Gold loans offer a useful source of urgent financing by unlocking the value of idle gold assets in your possession. However, you need to evaluate the loan amount you qualify for, the interest and charges involved, repayment capacities, and lender reputation before jumping in.
Stay aware of the key factors covered in this blog post to ensure you have all the right information to make the most appropriate gold loan decision as per your specific financial situation and needs.
