Date:31/03/2023

If taking out a loan is the only way to manage the sudden financial crunch and you have exhausted all other possibilities, choose a gold loan over a personal loan. If the borrower possesses the necessary KYC (Know Your Customer) documentation, he can obtain a loan against gold within an hour.

Experts agree that gold loan products can vary across non-banking financial institutions and banks. If a person is seeking a loan secured by gold, he should be aware of this distinction and a few other crucial characteristics.

1. Quality of Gold

The better the gold’s purity, the greater its valuation and loan amount. Most lenders require a minimum purity of 18 carats. If you are seeking a loan secured by jewellery, the lender will disregard the value of jewels and stones. He will solely consider the gold’s worth. Additionally, many lenders do not accept loans secured by gold bars. However, they accept coins that are 99.99 percent pure and up to 50 grams in weight.

2. Banks or NBFCs?

The first step is to avoid jewellers and other small establishments. They are unregulated and have the ability to impose unfair terms and conditions. Fear also exists of fraud. For gold loans, a borrower should choose between banks and non-bank financial companies.

Among the organized players, there are NBFCs that specialize in gold lending. These lenders are more flexible than banks in determining the value of your gold and may also provide flexible repayment terms. Say that a bank and an NBFC are lending you 75 percent of the value of the gold. However, if an NBFC places a higher value on gold, it will grant a larger loan amount.

While NBFCs could offer larger loan amounts, banks provide gold loans with cheaper interest rates.

3. Disbursal time

Borrowers are needed to provide their ITR forms/pay stubs and other papers when applying for a personal loan in order for their applications to be completed. Due to the time-consuming nature of document verification, the disbursement of personal loans may take between 2 and 7 days. However, some lenders claim to offer faster disbursement of personal loans, particularly for pre-approved loans.

The gold loan offers one of the quickest disbursements of all loan alternatives, typically being disbursed within a few hours of loan application submission. The review procedure is predicated solely on the quality of the collateral, with little or no attention placed on the credit profile of the borrower.

4. Payment Choices

NBFCs whose core business is gold loans also offer several repayment options. In addition to the standard equated monthly payment (EMI), a borrower might choose for a lump-sum payment. In this case, the lender will deduct interest from the borrowed amount up front. If, for example, the sanctioned amount is 1 lakh and the interest rate is 10,000, the lender will provide a loan of 90,000. At the end of the term, the customer must pay the lender 1 lakh. This is typical of NBFCs.

There is also an option for the borrower to pay interest as an EMI and principal at the conclusion of the loan term. This is typical of banks.

Gold loans are only appropriate for addressing short cash flow issues. According to intermediaries, they should not be used to pay for a large expense (such as a wedding or college tuition) or to acquire another asset. Therefore, it is recommended to choose a standard EMI option. Other repayment alternatives are better suited for business people with irregular cash flow.

5. Other Charges

Typically, there is no prepayment requirement for gold loans. A few financial institutions can charge up to 1 percent of the loan balance. In addition to processing fees, lenders may also impose valuation fees.

Currently, gold prices are close to an all-time peak. If gold prices recover in the future, the lender may require the borrower to promise further gold. The concept is that the loan should equal 75% of the gold’s worth.

In addition, if the borrower cannot return the loan on time, the lender has the authority to auction off the gold. However, this only occurs after repeated reminders.

Gold loans can assist you in resolving a temporary cash flow issue, but you should keep the loan term short and seek organized lenders, as they are regulated by the Reserve Bank of India.