Gold Loan : Indians have been traditionally investing in Gold but such investments have been more due to emotional and social reasons than financial ones. Gold Jewellery makes a few guest appearances and later finds its place mostly in the bank lockers. Apart from letting you brag about your gold collections at family functions, Gold jewellery now has another use for you – YOU CAN MONETIZE YOUR GOLD ORNAMENTS WITHOUT SELLING THEM.
What is a Gold Loan?
A Gold Loan is a loan given by banks and NBFCs against the security of your gold ornaments and jewellery. It must also be noted that the gold loan is available only against the security of gold jewellery and not against bullion/primary gold including gold ETFs/ mutual funds. The loan is granted on the basis of the market value of the gold and is further guided by the guidelines issued by the Reserve Bank of India (RBI).
RBI Guidelines in respect of Gold Loans
RBI has put in place several safeguards for loans against gold ornaments and jewellery. The primary one is in respect of the Loan-To-Value (LTV) Ratio. Loans (including bullet repayment loans) against the pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery. So, you can avail of a loan of Rs. 75 for your gold jewellery valued at Rs. 100. LTV ensures that the banks have sufficient cushion against the fall in the value of the security. As such, even in the case, the market value of gold ornaments fall by 25%, the bank’s exposure to the gold loan remains fully secured.
Further, RBI stipulates that an LTV of 75 per cent has to be maintained throughout the tenure of such loan and not just at the time of loan sanction. The exposure considered for ensuring 75% LTV must also include the accrued interest so outstanding. Also, in case the principal and interest are repayable at the end of the loan tenor, the loan cannot be sanctioned for more than 12 months.
Benefits of Gold Loans
Gold loans carry several benefits for the borrowers, as listed below:
- The utilization of Investment blocked in Gold Jewellery – Gold loan lets you avail the financial value lying locked in gold jewellery. It may difficult for you emotionally to part with certain jewellery but you can always avail of a loan against this jewellery, as you will get the jewellery back upon repayment of the loan.
- Faster Processing of Loans – RBI has standardized the gold valuation by benchmarking it to the average of the last 30 days as quoted by the India Bullion and Jeweler’s Association Ltd. or the historical spot gold price data publicly disseminated by a commodity exchange in a consistent manner as per their Board approved policy. As such, the loan eligibility and processing happens at a much faster pace than other loans.
- Available even in Absence of Credit History – Considering the availability of sufficient security which is relatively liquid as well, banks do not generally care if the borrower has a bad credit history, as banks always have sufficient security cover to fall back upon. Therefore, any person with a low credit score and requires funds on an urgent basis can avail of a gold loan.
- Flexible Repayment Options – Since gold loans are allowed for miscellaneous purposes, the repayment can be set to be flexible ranging from a monthly payment option or a bullet repayment at the end of the loan term, as the cash outflows are not required to be matched with the cash inflows.
Here are a few things to keep in mind before you avail of a Gold loan
- Loan amount
The gold price keeps fluctuating. So, in order to obtain a gold loan, the calculation of loan value is done in different ways. Some calculate the last two weeks’ gold prices and then take an average price for determining the rate per gram of gold; while some take the daily rate for valuing your Gold. Consider which plan suits you the best and which plan gives a higher value to your gold.
- Interest Rate
One of the most important factors to consider while getting any loans is the rate at which you’re obtaining the loan. The rate of interest on Gold loans is comparatively lesser than Personal loans. But after all security of your Gold Ornaments and speed of delivery matters the most when one chooses between multiple choices. So as word of advice if going for a gold loan,, make sure the lender is reliable and trustworthy.
- Short Term
Gold loans as such are meant only for the short term. Mostly, they give 12 months duration to repay. Make sure you are able to repay the interest and principal within the time limit. Gold loans are a good way of receiving immediate cash to fulfil the needs in case of emergencies.
- Repayment structure
Clarify all the doubts in the terms and conditions of the lender, to repay the loan before availing one. Gold loans have a flexible repayment structure as compared to any other loans. It’s always better to understand the terms carefully before availing of the gold loan. A final word of caution-NAVER DEFAULT IN REPAYMENT OF GOLD LOAN, IT WILL COST VERY HEAVY.
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