Gold signifies wealth and prosperity in Indian culture. Purchasing gold on specific auspicious occasions is a custom. People bought a small amount of gold on every occasion. Collectively, it amounts to a lot due to years of accumulation. Passing down the gold to the next generation was yet another sentimental custom.

Getting gold products in gifts was considered a blessing. Traditionally, gold ornaments only symbolised the blessings that ancestors were passing through these ornaments. But looking at the security gold provided, it wouldn’t be wrong to say that the ancestors were passing on financial security to the next generation in the form of gold.

Gold has been used as a mortgage to take loans in need for centuries. Zamindars and Saavkars would provide liquidity against gold ornaments and artefacts. Today, banks supply the same aid. The Gold Loan has become one of the fastest-growing services compared to other financial products.

Many reputed banks/NBFCs accept gold objects such as gold jewellery and ornaments as security to provide loans. The loan amount one can acquire against a gold item varies depending on the purity of the gold in the jewellery, the LTV Ratio, and other internal lender limitations.

Because both banks and NBFCs offer gold loan services, comparing their rates, qualifying conditions, and loan amounts are vital. Every lender may have a predetermined minimum and maximum gold loan limit. To illustrate with an example, ICICI Bank sanctions gold loans ranging from Rs 10,000 to Rs. 1 crore, whereas SBI provides gold loans ranging from Rs.20,000 to Rs.50 lakh.

Let us look at the following table to know the minimum and maximum gold loan amounts offered by various banks in India.

Factors To Consider For Gold Loan Application

1. Requirement Of Documents

The only documents required for gold loan application are identity proof, address proof, and recent passport-sized photos. Banks and NBFCs might have additional document requirements to add a layer of protection, but most institutions do not require extensive documentation.

2. Loan Amount Limitations

The gold loan amount is determined by estimating the value of the gold via purity and weight. You can use gold loan calculator to calculate gold loam amount against gold weights. Every financial institution has a sanctioning limit and can offer loans within the permissible range only. Although, higher limits are allowed only in special cases. For such high amounts, special permissions from the management are mandatory. The management agrees with the higher loan amount only if the borrower has a positive repayment record.

3. Gold Valuation

The value of gold is determined based on the weight and purity of the gold. A gold loan amount sanctioned is up to 75% of the market value of the gold mortgaged. The loan-to-value ratio, in this case, is capped by the Reserve Bank of India.

4. Reclaim

There is no restriction on the number of times a gold ornament or any other form of gold can be mortgaged. This facility enables the borrower to take credits over and over on a single piece of gold. Also, this feature only applies to gold loans and not other personal or business loans. The borrower does not have to change the Bank or NBFC to reclaim the loan.

5. Flexible Repayment Options In Gold Loan

With various repayment options available for gold loans, the adaptability to reimburse the principal amount and interest in various forms is advantageous. The feature encourages entrepreneurs and small company owners who fall short on cash to choose gold loans over other business loan options, which consist of high monthly EMIs and rigid repayment schemes. Each Bank or NBFC has its unique policy for gold loan repayment options and borrowers must read and understand the terms and conditions of repayment before applying for the loan.

6. Credibility of the lender

When pledging your precious gold, prioritise security and transparency. Avoid unregulated jewellers and small shops or ‘pawn shops’ who could also be charging exorbitant rates of interest at unfavourable terms and conditions. They could also be frauds. Ensure the bank or the lending institution you are considering is approved by the Reserve Bank of India. You can visit RBI's website or check it from other reliable sources online.

7. Interest rates

An applicant must study the interest rates the lenders are charging in the market, as interest rates may be fixed or floating. The applicant must also get complete information about the change in interest rate, if any, during the time of the loan. This typically happens if the interest rate is linked to the Marginal Cost of Funds-based Lending Rate (MCLR) specified by the RBI.

8. A gold loan from an NBFC or a bank

An applicant can opt for a gold loan from a bank or a Non-banking Finance Company (NBFC). While the former charges a lower interest rate, the latter's interest rate is on the higher side owing to the inaccessibility of large deposits. In this respect, IIFL Finance offers an attractive rate of interest on its gold loan along with other features such as a customised gold loan, online application process, minimal documentation, no need for credit score and flexible repayment options. An NBFC or a bank is better than a pawn shop or unorganised lender.

9. Type of gold that will be accepted

Banks and NBFCs generally accept gold valuables, meaning jewellery, with 24K or 22K karatage or purity. The minimum purity of gold that they accept is 18K. An applicant should also know that lenders consider the value of gold only and not that of jewels, pearls, and other precious stones when deciding the loan amount.

10. Tenure of the gold loan

An applicant should choose a gold loan tenure that aligns with their repayment capacity. Gold loans are generally of a short duration, and typically, the rate of interest is higher. Hence, one should consider the feasibility of a gold loan basis these factors.

11. Levies and charges on the gold loan

A gold loan attracts other charges and levies such as processing fees, valuation charges, Mark-to-Market charges, auction charges, SMS charges, stamp duty, and early closure fees, as the case may be. The applicant must factor these into their decision-making process.

12. Security and insurance

An applicant should know how the lender will store the pledged gold. Applicants should also enquire about the insurance coverage on the gold with the lender. IIFL Finance stores the gold in secured steel vaults and also offers insurance coverage.

13. Default and its implications

A borrower should also know the impact of defaulting on a gold loan. The applicant should understand the terms related to late payments and the possibility of auctioning the gold in case of a default.

14. Deposit of gold

After a gold loan application is duly filled and submitted, the applicant and the bank/lender sign a gold loan agreement. The applicant then deposits the evaluated gold loan in the bank, and then the loan is disbursed. The gold stays with the bank till the repayment.

Factors that Impact the Gold Loan Rate of Interest

Prevailing gold rate in the market - The current price of gold in the market is an important determinant of the rate of interest on a gold loan. The higher the price of gold, the higher the value of gold. Then, the lender charges a lower rate of interest as the risk is also lower.

Current gold rate per gram - The interest rate on a gold loan is indirectly influenced by the current gold rate per gram, primarily through its impact on the Loan-to-Value (LTV) ratio. There is an inverse relationship between the gold rate per gram and the LTV ratio – higher gold rates tend to result in a lower LTV ratio. A higher LTV generally means a higher loan amount but also increases the risk for the lender. The interest rate is influenced by various factors such as the lender's policies, market conditions, regulatory guidelines, and the borrower's creditworthiness. Lender policies regarding LTV ratios and interest rates may vary, making it essential for borrowers to understand these policies and compare offers from multiple lenders to find the most favourable terms for their financial needs.

Loan-To-Value ratio - When considering a loan by pledging gold, LTV ratio is vital in determining the interest rate. A higher LTV ratio translates into a higher interest rate on gold loans, making the loan relatively risky. The risk arises from the low margin for error on the probability that an applicant may default.

Weight of gold - A higher weight of the gold valuables enables borrowers to secure a higher loan amount, assuming the purity of the gold is held constant. A higher loan amount means higher risk and, thus, a higher interest rate.

Purity - The rate of interest on a gold loan is significantly influenced by the karatage or purity of the gold ornaments submitted as collateral. A higher purity level in the gold ornaments results in a lower interest rate. Consequently, gold items with a purity of 22K are expected to incur a lower interest rate than those from 18K gold.

Monthly income - If an applicant demonstrates stability of employment or business, the lender is more likely to charge a lower rate of interest on the gold loan as the risk is low now.

Demand and supply for gold - The supply of gold is short, while the demand is always high. This results in high prices of the precious metal. This bodes well for borrowers as the interest will be low now.

Inflation - In persistent inflationary conditions, people shift to gold as a store of value. A large population turning to gold also pushes the price of gold higher while bringing the interest rate on the gold loan down.

Benchmarking to an external rate - The fluctuation in interest rates on gold loans is influenced by the policies of the RBI. Lenders employ two benchmarking methods to determine these rates, the repo rate-linked interest rate and the Marginal Cost of Lending Rate-linked lending rate. Lenders have the flexibility to choose either of these benchmarking methods. Those aligning their gold interest rates with MCLR tend to charge lower interest rates on their gold loans.

Repayment frequency: The relationship between the repayment frequency and the interest rate on a gold loan is inverse. Borrowers who choose a higher frequency of EMI payments may incur a lower interest rate on their loan, while those opting for a lower frequency could face a higher interest rate.

Borrower-bank relationship - A borrower with a long association with the bank may be charged a lower interest rate on their gold loan. This means the interest rate is negotiable to some extent.

Apply For A Gold Loan With IIFL Finance

With IIFL, avail all the benefits of gold loan services. The documentation of IIFL consists of ID proof and address proof. The smooth operational system of IIFL makes the process of gold loans easy. IIFL approves a loan of the minimum amount of Rs 3,000 and the maximum amount of up to Rs 50 lakhs. To apply for gold loan visit our branch or opt gold loan at home service.

A gold loan from IIFL Finance is a smart and convenient option to raise additional cash for personal, business or medical purposes. The gold loan from IIFL Finance is customised to offer immediate funds without requiring too much documentation or paperwork. The applicant is also not required to submit their credit score. The rate of interest is also among the best in the industry. The sanctioned loan amount is the highest, with no hidden costs.

Besides, IIFL Finance offers its customers the flexibility to repay the loan as per their convenience, such as EMIs, or as a one-time single repayment.

One can also use the gold loan calculator on the IIFL Finance website to get an idea about the loan they can get.

Conclusion

There are so many factors for a borrower to know when applying for a gold loan. The interaction between prevailing gold rates, current rates per gram and the loan-to-value ratio indirectly influences interest rates. Opting for a reputable lender like IIFL Finance ensures competitive rates, transparency and flexibility, though borrowers should be cautious of potential constraints like fluctuating gold prices and processing charges. A well-informed approach, considering the borrower-lender relationship and negotiation possibilities, enables wise decisions in using gold assets for immediate financial needs.

FAQs

Q.1: What is the margin in a Loan against Gold at IIFL?
Ans: Typically, every bank or NBFC maintain a margin of at least 25% in the case of loans against gold. The margin implies that an individual can avail up to 75% of their gold’s market value as the loan amount. For example, if the valuation of gold is Rs. 1 Lakh in the market, then IIFL will offer you a maximum loan amount of Rs. 90,000.

Q.2: What Documents do I need to apply for Gold Loan at IIFL?
Ans: Basic KYC documents such as identity proof, address proof and two photos of the applicant are mandatory at all the IIFL branches to avail loan.

Q.3: What happens if an individual cannot repay their loan amount?
Ans: Bank/NBFCs will provide periodic reminders to the customer about the payment after the end of the tenure. After that, they deliver a final notice to the customer via call or message about the auction. Lenders can then sell the deposited gold in an auction.