A gold loan is a secured loan where the borrower pledges their gold, ranging from 18K to 24K, with a bank or financial institution as collateral in exchange for capital. In essence, a gold loan is analogous to a “mortgage loan,” where the borrower uses their house or property as collateral to secure a loan from the bank.
The functioning of a gold loan involves several key steps:
Quality check: When a customer seeks a gold loan from a financial institution, the first step is to assess the purity and value of the gold jewelry intended as collateral.
Loan approval: After determining the quality and value of the jewelry and completing the KYC process, the financial institution and the borrower agree on the loan terms. Upon mutual agreement, the loan is approved, and the funds are credited to the borrower's account, typically within a few hours.
Gold loans are considered profitable for banks as they are not exposed to the risk of non-performing assets (NPAs). Even if the borrower defaults on monthly payments, the collateral (gold jewelry) remains with the bank.
Gold loans are suitable for:
Individuals with short-term fund requirements, serving as a working capital loan for businesses.
Individuals with a low credit score, as the collateral mitigates the risk for the bank.
Those who possess idle gold and are contemplating a personal loan, as opting for a gold loan can result in lower interest costs.
Individuals seeking loans from unorganized sectors due to fear of rejection by organized financial institutions. However, obtaining a gold loan from banks or organized players is recommended for lower interest rates and security.
Opting for a gold loan from banks or organized players is advantageous, as credit history does not significantly impact loan approval, given the secured nature of the gold loan. This approach helps save on interest costs, as banks adhere to market-compliant interest rates per norms, avoiding exorbitant charges.
