All You Need to Know about Gold Loan..!!

Many have said of Alchemy, that it is for the making of gold and silver. For me such is not the aim, but to consider only what virtue and power may lie within...!!
Paracelsus 

In today's time of fluctuating circumstances one needs to know all the avenues for generating cash. Besides any other reason to invest in gold, the ease with which you can get a loan against your the gold holdings plays a significant role.So in case of any emergency, it was the gold loan which was resorted to for arranging such emergency funds.

Very recently few banks and NBFCs (non banking financial companies) who are very active in the market are providing Gold loans on the basis of the value of the ornaments. 

Few of its salient features and how this industary works... are given below..!!

• The lender take the interest on gold loans on the basis of Loan to the value (LTV) ratio of the gold ornaments. Higher the LTV, higher the rate of interest charged by the lender as he is left with lower margin. 

• Interest ranges: Depending on the LTV, the rate of interest ranges between 12% - 28% p.a.

• How much lending: Lenders earlier used to finance up to 90% of the value of gold jewelry / ornaments. However with the latest RBI instructions, now these companies have been instructed to lend only 60% of the value of the ornament. 

• Gold loans duration: Typically are for the duration of one year and the duration can be further extended at the prevalent rate of that time. During the period you are supposed to pay the interest regularly.

• How Gold loan score over Personal loan: 

• Processing time  and Processing fees: for gold loans is very very less as compared to personal loans.

• Creditworthiness: The lender is least bothered about the creditworthiness of the borrower,since the gold loans are fully backed by tangible assets and they retains a reasonable margin. 

• Rate of interest: charged on gold loan is lower than personal loans. 

• Remember 

• Lower the amounts of loan taken per gram, lower will be your interest rate.

• The lender will evaluate your jewelry and will provide the loan based on their valuation rather than the cost mentioned in your purchase bill. 

• How NBFCs (non banking financial companies) changing the rules of the game: 

• Muthoot Finance and Manapurram Finance are two very active players in loan against gold jewelry. Banks like HDFC Bank, State Bank of India, Central Bank of India and Indian Overseas Bank, ING vysyabank, Federal bank, also provide these loans.  

• The NBFCs are not allowed to sanction gold loan against any  gold bar and gold coins. Thus they can only lend against gold ornaments. This restriction ensures that default rate on gold loans is minimal as the buyer has a sentimental attachment with the gold ornaments. 

• Repeat Reminder: 

• The money lent to customer is on lower side as compared to the perceived value by the borrower as the lender only considers the value of the pure gold while granting gold loans. Thus the actual cost to the borrower is higher than the actual gold component in the ornaments.

• Documents needed for Gold Loan

• Identity proof such as passport, voters ID or driving license.

• Address proof such as electricity bill, ration card, telephone bill etc.

• For signature proof you need to submit your passport copy, driving license or any other document with your sign.

• 2 passport size photographs. 

• Some Charges associated with Gold Loan:

• Processing charge: NBFCs usually waiver these charges, while some banks do charge a processing fee of 0.5-1 %.

• Valuation Charge: These are the charges to be paid to the valuator. These charges are also specific to the service provider and those having in-house valuators do not charge any extra amount for valuation.

• Pre-payment charges: NBFCs usually do not charge a penalty for repayment before the loan tenure is over. But one must better check for these.

• Late payment charges: Most of the service providers charge late payment penalty and this too can vary from one institution to the other.

• My Recommendation about Gold Loans

• While choosing for gold loan check the interest rates in various private finances and banks. Better to go with one who has been in this business for many years if you plan to go with  private lenders. 

• Go for gold loan only if you are confident of returning the money in time otherwise, you will be penalized and all your gold will come under the control of bank or finance company.

It is advisable to check with the loan provider before taking the loan. These charges could change the amount that you may finally receive. Thus gold loan is a product which is evergreen due to its various positive features like ease to obtain and relatively lower rate of interest.