How Does The Gold Loan Work?

Gold jewellery lying unutilized in a locker at home or in a bank is one of the most practical options to meet one’s immediate funding requirements. This jewellery can be pledged with banks and non-banking finance companies (NBFCs) to secure hassle-free loans and address the short-term liquidity problems.

Indeed, gold loans are among the most popular credit products in India thanks to the ease of borrowing. Another major reason for their popularity is that, unlike other secured loans such as a home loan or a vehicle loan, proceeds from the gold loan can be used for any personal or even business purpose.

Gold Loan Process

Like any other secured loan, in a gold loan the borrower pledges their gold jewellery as a collateral with the lender. An important thing that every gold loan applicant must be aware of is that mostly lenders accept gold jewellery with purity of at least 18 karat. Moreover, as per the Reserve Bank of India’s norms, banks and NBFCs offer only up to 75% of the gold’s value as a loan in order to manage their risks.

The lenders conduct an evaluation process to check purity and establish the weight of the gold. Lenders analyse both the quality and quantity of the gold to determine its value based on the current market price of the gold.

Once the evaluation process to sanction the loan amount based on the market value of the gold is done, the lenders verify documentation. Compared to other loan products, gold loans require minimal documentation (like identity proof and address proof) and do not involve any heavy paperwork. The loan is quickly disbursed after completing the evaluation and verification process.

Gold Loan Tenure

Gold loans have a short repayment tenure because volatility in gold prices can have a negative impact on loans. A majority of gold loans have repayment periods ranging from three to 12 months. To minimise losses caused by any change in the price of gold, most lenders offer gold loans starting from one month to a maximum of three years.

The maximum tenure is different with every lending organization but it never goes beyond five years. It is up to the borrowers to choose the repayment tenure judiciously depending on their financial obligations and repayment ability.

Repayment Mode

Borrowers must repay the principal amount along with the interest over the loan term to get back the pledged gold articles.

The repayment terms and conditions vary from one lender to another. Borrowers can either pay the interest amount upfront and the principal amount at the end of the tenure or can even choose to pay off the loan through equated monthly installments like any other loan where interest and the principal are paid together.

Interest On Gold Loan

Secured loans typically have lower interest rates than unsecured loans. Being secured by nature, gold loans carry lower rates of interest as compared to unsecured loans because the gold used as a security reduces the risk of the lender. The lender holds on to the asset until the loan is fully cleared. In case of a default, the pledged gold can be auctioned to recover the losses.

There are several external factors that are in play to determine the price of the gold, thereby shaping the interest rate of a gold loan. Additionally, the interest rate offered by the lender also depends on the quantity and purity of the pledged gold, the applicant’s monthly income and credit score, loan amount and repayment tenure of the loan.

Gold loan interest rates also depend on the loan provider. Banks usually charge lower gold loan interest rates than NBFCs. Even within banks and financial institutions, the gold loan interest rates differ from lender to lender depending on the benchmark method they follow. There are two types of benchmarking methods – MCLR-linked lending rate (internal) and repo rate-linked lending rate (external).

Conclusion

A gold loan, backed by gold jewellery, can be an instant solution to get a secured credit facility. Gold loans have much lower interest rates and can be an ideal alternative to personal loans and credit cards.

The amount of money a person is eligible to borrow against the gold and the interest offered depends on the lender. As such it is good to compare the interest rates of at least two to three lending institutions and then choose the lender offering the best deal.

IIFL Finance offers instant funds against your physical gold to meet your emergency financial requirement. Gold loans at IIFL Finance are offered through a quick and fully online application process that can be completed within minutes while sitting at home. IIFL Finance offers gold loans at affordable interest rates and flexible repayment tenure that can even be customized depending upon the borrower’s income or cash flows.