Gold has been the most preferred form of investment for Indians. It has always been seen as an asset that offers a shield against future inflation and the need for finance in a crunch situation. Gold loans are also a byproduct of this Indian belief system. Gold loans allow borrowers to seek finance while pledging the precious metal as collateral. The lender evaluates the gold article before verifying the submitted documents and sanctioning the loan amount.
The loan amount sanctioned by the lender is usually a certain percentage of the gold’s value as per the present market rate. It can come in handy option for borrowers who have a lower credit score. While gold loans have become a popular option for financing, there remains a certain confusion about them in the public. One of them is that gold loans are offered by only traditional jewellers or established players. In contrast, the recent popularity of gold loans has been driven by non-banking finance companies (NBFCs) who aren’t traditionally associated with this business.
Gold loans were offered by only jewellers, but this was the case several years ago. As more and more institutionalised lenders emerged, they took place as prominent players. Additionally, gold loans offered by jewellers are not legally bound. So, in case of any dispute, it may become difficult for the borrower to seek redressal. In contrast, banks and NBFCs are legally bound and hence borrowers can report any dispute to the regulatory body and seek redressal. These institutions are mandated to follow guidelines for loan disbursal and keeping the pledged gold with safety. This offers better surety for the safety of the gold items offered as collateral for the loan.
Most companies involved in the gold loan business are hardcore finance ventures and offer a systematic process. So, they must be charging a higher interest rate? Actually, not. Most gold loans offered by banks and other licensed NBFCs are cheaper or on a par with personal options. It’s easier for a persona, with a lower credit score to get a gold loan than a personal loan from a bank.
Banks offer gold loans at somewhere between 9 and 18 per cent interest. While gold loans by NBFCs can be comparatively more expensive, they tend to offer a better loan-to-value ratio (the amount available against the value of the pledged item).
Another misconception about gold loans is that old gold is not eligible for loans. In reality, gold, 18 carats or higher, no matter how old, is eligible for a loan. However, antiques or exquisite jewellery offer more value as their worth increase with time.
Gold loans are one of the easiest-to-get options available in the market and involves little paperwork when compared to other options. The lender will allocate you the loan depending upon the agreed ratio of the gold value. Gold loan documentation is basic ID proof, address proof, and passport-size photographs. The process usually takes somewhere between a day to a week for loan disbursal.
The interest rate on gold loans can depend on the borrower’s credit score and other factors. The rates also vary from lender to lender. Thorough market research may allow the borrower to crack a better deal.