What is Gold Loan?
Banks and NBFCs give you loans against gold. Borrowers can pledge gold coins or gold jewelry and avail a gold loan. The purity of gold has to be between 18-24 carats.
Gold Loan is a product designed to provide liquidity against gold ornaments without having to sell them. Gold ornaments lying idle can be put to better use by availing loan against gold ornaments.
Gold Loan will be sanctioned on submission of all the required documents and satisfactory assessment of gold ornaments. Typically, Gold Loans have tenure of one year. This can be further extended.
Features of Gold Loan given by Banks
A bank sanctions a Gold Loan for a maximum of up to 60% of the value of gold.
Banks charge EMI for repayment of Gold Loans.
Banks charge lower interest rates than NBFCs.
Simple documentation and fast processing.
Overdraft limit varies depending on the market rate of gold.
Features of Gold Loan given by NBFCs
No EMIs. Borrower has to pay interest till they repay the loan, after which, the borrower will have to repay the principal.
A borrower can avail a Gold Loan for a maximum of up to 75% of the value of gold.
NBFC charges a higher interest rate on Gold Loan than a bank. It could be around 22-24% a year.
Interest rate is payable only on amount of the overdraft that you use.
Overdraft limit varies depending on the market rate of gold.
Simple documentation and faster processing compared to banks.
There are no processing charges and pre-payment penalty.
To avail a gold loan from an NBFC, a borrower can pledge only gold jewelry and not gold bars or coins.
Eligibility for Gold Loan
The borrower should be in the age group of 18-65 years.
Maximum age of applicant at loan application should not be more than 65 years.
The purity of gold ornaments should be 18 carats and above
The Gold Jewelry should be owned by the borrower or any of the family members.
Advantages of Gold Loan
No income proof is required to apply for a Gold Loan.
Banks don’t check credit history to grant Gold Loan.
Gold loan has less documentation.
Gold Loan interest rates are low as compared to personal loans.
Agricultural loan against gold is available for an agriculturist at a nominal rate of Interest of 7 - 8% per year.
In case of NBFC, borrower will have an option to pay only interest during the tenor of the loan. At the end of the tenure, the borrowed amount is to be repaid in a single shot.
Gold Loan takes less processing time.
Gold Loan has nominal processing fee or no fee at all.
Documents required For Gold Loan
Passport
Voters ID
Driving license
Electricity bill, ration card, telephone bill
2 passport size photographs
Types of Gold Loans
Based on the purpose of lending, Gold Loans are categorized into various schemes. Agricultural Gold Loans offered to farmers and agriculturists are at a lower rate of interest.
1.Agricultural Gold Loans:
Agricultural Gold Loans are loans granted to farmers and agriculturists against gold ornaments, to fund their crop production and investments in agriculture and allied activities. Key Features of such loans are:
Evidence of farming like land records.
The purpose of the loan given in writing by the borrower.
Maximum loan tenure is 3 years.
Banks offer options of an overdraft facility.
Interest rate ranges from 8 - 10%.
2.Non Agricultural Gold Loans:
All loans extended to borrowers other than farmers and agriculturists are called non-agricultural Gold loans. The features of non-agricultural gold loans have been explained under the loan schemes by repayment options.
Gold Loan Repayment Schemes
Banks may offer you the facility to repay a Gold Loan in the following ways:
1. Bullet Repayment:
Under the Bullet Repayment Scheme, banks and NBFCs offer borrowers an opportunity to repay the entire principal amount at the end of the tenure, in a single shot. This scheme is suitable for loans with a short tenure.
2. EMI Scheme:
Under the EMI scheme, borrowers who avail gold loans are required to pay monthly installments or EMIs to banks. This scheme is suitable for gold loans of a higher tenure with larger loan amounts.
3. Overdraft Scheme:
Overdraft Scheme is designed for businessmen and self-employed people, whose need for funds keep on fluctuating. Under this scheme, a borrower can withdraw funds or deposit surplus amounts in an overdraft account, during the loan tenure, within a pre-approved credit limit. Interest is charged on the utilized amounts only.
What happens if gold prices fall during the tenure of the Gold Loan?
It is a general notion that gold prices are always on the higher side and will not fall drastically. However, like every commodity, gold prices do fall. A maximum Loan To Value of 75% of the gold pledged is granted as a Gold Loan in case of NBFCs. As gold prices are not constant, banks are required to maintain the Loan To Value (LTV) consistently.
In case of decline in gold prices, banks may:
Ask for more collateral or gold to maintain the LTV.
Ask the borrower to partly pay a nominal amount towards the principal.
If the borrower defaults, the gold may be auctioned after sending notices and reminders.
