Factors You Can’t Ignore While Applying For A Gold Loan

A gold loan is the best way to garner external financial resources for meeting short-term personal or business requirements. Borrowers can simply use the gold jewellery they own and lying unused in the cupboards or bank safe by pledging it temporarily with a lender and borrowing against it.

Lenders are quite comfortable lending against the yellow metal because of the secured nature of the loan and the fact that the value of gold remains fairly stable over time and mostly moves higher.

But there are multiple factors one should remember before applying for a gold loan.

Eligibility:

A gold loan is primarily provided against gold jewellery. So, if you own gold utensils or biscuits you would be ineligible for a gold loan. However, gold coins issued by banks are acceptable by the same banks as a collateral.

At the same time, lenders look at purity of the yellow metal as the value of the collateral is derived and dependent on the purity of the gold. In fact, other precious metals studded in the jewellery along with gold are not considered while factoring in the collateral.

Amount:

The loan amount is based on the value of the collateral. This, in turn, is based on weight and purity of the gold. However, lenders do not sanction the same amount as the value of the gold being pledged. As per regulatory norms, lenders can give a loan amount which is no more than 75% of the value of the jewellery.

Interest Rate:

Borrowers need to not just repay the amount borrowed but also the interest rate that is applicable for availing the loan, which is essentially the cost of capital. This interest rate is dependent on various factors including the loan amount, monthly income and credit score of the borrower, and tenor of the loan, among others. Borrowers need to check the rates offered by different lenders before picking one.

EMI:

Borrowers need to be aware of the equated monthly installments (EMIs) they are expected to pay as per the loan terms. They can calculate the tentative EMI beforehand to know what they would be paying back every month. This helps one to plan ahead and decide on how much loan they should apply in the first place to be able to pay back.

Repayments:

While gold loans come with a standard payment structure where the EMIs have principal and interest components, many lenders also offer a bullet payment structure. In the latter, one can just keep paying the interest dues every month and return the principal amount at the end of the loan tenure with a single payment.

Conclusion

The gold loan market has been growing at a fast clip due to the ease of availing it and because it carries the lowest interest rates compared to other personal loan products.

However, borrowers need to consider a clutch of factors before applying. These include what type of gold article they can pledge for availing the loan, the amount they can expect to get, and the interest rate they would be paying. They should also decide on a payment structure according to their paying capacity and monthly income.