Gold holds a certain sentimental value for all Indians. For generations, gold has been the mainstay of our emergency funds. It is not just utilized as an ornament that adds to an individual’s charm, but is also an appreciating investment asset. People don’t stop at buying just ornaments, but gold coins, bars and biscuits too have many takers. This is why Gold loans have become a prevalent means of raising funds to meet urgent monetary requirements.
The practice of availing loan against gold has been around for centuries through unorganized money lenders. However, considering its volatile nature, many financial institutions have begun valuing gold as an investment tool on which mortgage can be applied.
Since gold is a commodity whose value has been growing constantly, gold loan provides the perfect opportunity to utilize the power of gold. Instead of paying higher interest rates on personal loans, it is better to put your idle gold to use. The reason why borrowing against gold is emerging as a preferred financing option is the lesser interest rate charged by institutions in comparison to other retail loans, such as personal loans.
How does a gold loan work?
When you pledge your gold ornaments, coins, biscuits, bars, etc., you are provided with cash at a predetermined rate of interest by the lender. Once the scrutiny of basic documents and evaluation of the pledged gold is done, the loan amount is paid out in the form of cash, demand draft or at times, is transferred to the borrower’s account.
Benefits of gold loan
- You don’t have to sell your gold but mortgage it, and when you repay the loan, you get the gold back.
- You can get a loan of up to 80% of your gold’s value.
- Even individuals with low income or from lower economic strata, who may not be eligible for traditional loans, can avail this loan without difficulty.
What makes gold loan different from personal loan?
- It is a secured loan as gold is deposited with the bank prior to lending the money.
- The repayment term is short (0-3years).
- The amount of the loan depends on the value of gold, and not on the repaying capacity of an individual.
- The interest on loan can vary from 13-16% per annum. For those involved in agriculture, rate of interest of gold loan is reduced which can be as low as 8%.
How is your Gold evaluated?
The method of evaluation of pledged gold varies from lender to lender. However, generally, loans for jewellery with the “Hallmark” sign are sanctioned on the basis of the weight, purity and current market value of gold. The carat range is from 18 to 24.
Do note that the weight or value of precious stones embedded in the gold jewellery is not taken into account when your gold is being evaluated.
In case your jewellery doesn’t bear the “Hallmark” sign, then the valuation of your gold will be untrustworthy and you may end up getting a lesser amount than the value of your gold.
Since gold loans are secured loans, if you fail to repay the loan within the pre-specified period, not only will you be charged a higher interest but your gold may as well be auctioned. Be cautious when choosing a gold loan lender as the chances of losing your gold are higher in case of default.