Things You Should Know Before Getting a Gold Loan

Gold is not only financially but also culturally important in India. Apart from being a symbol of wealth and security, it may also come to the rescue when you require quick access to funds. By borrowing a loan against your gold assets, you can unlock their value without having to sell them. However, before pledging your ornaments at a financial institution, you must know a few things to make an informed decision.

The following sections will explore the essential things you should know before applying for a Gold Loan, including loan eligibility, repayment terms, security, and Gold Loan interest rates.

What is a Gold Loan?

A Gold Loan is a secured loan that you may obtain from a financial company by pledging your gold as collateral. When you approach a lender, they assess the purity and weight of the gold, determine its current market value, and disburse a permissible amount according to the latest RBI’s LTV guidelines. Since you seek a loan against physical gold, the approval process is much faster compared to unsecured loans.

Most Indian households prefer this type of borrowing because they don't need to sell their gold for money. You continue to retain ownership of your gold and get it back once you repay the loan in full. However, the lender keeps it in safe vaults with security and insurance.

In case of default, the lender reserves the right to sell the pledged gold to recover their dues. Therefore, as a borrower, you must understand the terms carefully before proceeding.

Here are a few terms you should be familiar with:

Loan-to-Value Ratio (LTV)

The loan-to-value ratio, or LTV ratio, is one of the first things to check when seeking a Gold Loan. It determines the loan amount you are eligible to obtain against your pledged gold.

The Reserve Bank of India has capped the maximum LTV ratio at 85% for loans up to Rs 2.5 Lakh, 80% for loans from Rs 2.5 Lakh to Rs 5 Lakh, and 75% for loans above Rs 5 Lakh. For example, if your jewellery is valued at Rs 10,00,000, the maximum loan amount available would be Rs 7,50,000.

Gold Loan Interest Rates

Gold Loan interest rates are another critical aspect of borrowing. Since the loan is secured, interest rates for Gold Loans are usually lower than those for personal loans or credit cards. However, the exact rate depends on the lender’s policies, the loan amount, repayment tenure, and the borrower’s profile.

When seeking a loan, compare loan offerings from multiple institutions before making a choice. A difference of even 1-2% can significantly affect the total repayment amount, especially if you are borrowing for a longer tenure. Additionally, check if the lender charges fixed or floating rates, as this will influence repayments in case of fluctuating market conditions.

Repayment Options

Explore the repayment methods available before finalising a loan plan. Common repayment options include:

●        Regular EMIs: Monthly instalments covering both principal and interest

●        Bullet Repayment: Payment of principal and interest at the end of the tenure

●     Interest-Only Payments: Paying only the interest during the tenure and clearing the principal at maturity

Choosing the right repayment option depends on your financial circumstances and cash flow. For instance, a business owner expecting a lump sum payment in six months may prefer bullet repayment, while a salaried individual might find EMIs more manageable.

Transparent Charges

Apart from the Gold Loan interest rates, you should also examine the additional charges. They might include the following:

●        Processing fees

●        Valuation fees

●        Documentation charges

●        Penalty for delayed payments

●        Foreclosure charges

Even if they offer a competitive interest rate, these extra charges can add up and increase the overall loan burden. It is always advisable to request a detailed fee structure before borrowing.

Gold Purity and Weight

The amount you receive as a loan largely depends on the purity and weight of the gold you pledge. Generally, lenders do not accept gold with a purity of less than 18 carats. They deduct the weight of stones or additional embellishments from the gold weight and consider only the gold content for valuation. Therefore, ensure pledging genuine and hallmarked gold to speed up valuation and ensure a fair assessment.

Risk of Default

While a Gold Loan provides quick liquidity, remember that defaulting can lead to the auction of your pledged ornaments. Therefore, plan your repayments carefully, especially if you have some emotional value attached to your pledged gold. Taking a loan beyond your repayment capacity leads to financial stress and potential loss of heirlooms.

Security of Pledged Gold

The security of your pledged gold is another key consideration when borrowing a loan against gold. Reputable lenders provide secure storage of gold in vaults with insurance coverage. Avoid unregulated lenders who may not offer adequate safety, even if they offer lower interest rates.

Quick Processing and Disbursement

One of the best things about Gold Loan is the speed of their approval and disbursal. With minimal paperwork and straightforward eligibility requirements, you can receive the funds usually on the same day. This makes these loans a practical solution for emergencies such as medical expenses, educational needs, and business requirements.

Impact on Credit Score

Many borrowers assume that secured loans do not impact their credit profile. This is a misconception. While loan eligibility does not depend on your credit history, lenders still report your repayment behaviour to credit bureaus. With timely repayment, you can build a positive credit score, while defaults or delays can impact it negatively. Thus, you may use a Gold Loan to raise funds and also strengthen your credit history.

Regulatory Framework

The Reserve Bank of India regulates Gold Loans in India. You should only deal with RBI-regulated finance companies and avoid informal lenders who may exploit your urgent need for funds.

Gold Loans are valuable financial tools that offer quick access to funds without the need to liquidate your assets. However, carefully examine the terms, especially the interest rates, repayment schedules, and associated charges, before pledging your ornaments. By understanding the points discussed above, you can avoid common pitfalls and make the most of your assets without losing ownership of your gold.