Gold loans are quite popular in India. Recent data shows that such loans have risen dramatically from around Rs 34,000 crore in March 2020 to almost Rs 61,000 crore in March 2021.
Data from IIFL Finance Limited, a financial and investment services company, shows that at the end of March 2022, it increased by a fifth to around Rs 74,000 crore.
How To Take A Gold Loan?
You can approach the bank or any other lender to apply for a gold loan. They will conduct a purity check of your gold to evaluate its market value and do some documentary verification.
You will need to produce an identity and address proof such as a permanent account number (PAN), Aadhaar, passport, or voter-ID card, etc., and provide a photograph.
"The lender verifies the gold quality and establishes its weight before estimating its market worth. Up to 80 per cent of the estimated value of the gold pledged may be approved for gold loans," says Dishi Somani, founder of Dishis Jewels.
Depending on the purity of the gold, which could range from 18 to 24 carats, borrowers can avail of a secured loan after depositing the yellow metal as collateral.
It is hassle-free and one of the quickest ways to get a secured credit facility. "The sanctioned loan amount is a percentage of the pledged gold’s present market value, called the Loan-to-Value ratio (LTV) as prescribed by the Reserve Bank of India (RBI)," says Deepak Singhal of Rupeek, a Rupeek a digital gold backed loan provider.
"You can also apply for a gold loan online, but you will still have to visit a bank branch or an NBFC (Non-Banking Financial Company) office to deposit the gold and complete the purity checks," says Nidhi Manchanda, a certified financial planner and head of training, research & development at Fintoo, a financial services company.
Risks Involved In Gold Loan Defaults
The lender is liable to charge a penal interest rate on the loan amount in case of non-payment.
"In case of persisting overdue, the company is bound to send periodic SMS reminders, calls, emails, and letters to alert them about the outstanding loan amount," says Somani.
The lender could sell or dispose of the gold through a public auction if the borrower doesn’t make full repayment. "From such sales, the company is entitled to apply any surplus toward any other liability the firm owes and return the excess funds to the borrower," Somani added.
The lender does not have a huge risk as the loan is backed by collateral. As per RBI’s guidelines, 90 per cent of the gold value can be given as a loan. However, risk arises for the lender when gold prices fall sharply, and the borrower defaults on payment. "To combat such situations, the lender may ask the borrower to pledge more gold or pay the margin," says Manchanda.
What Factors Affect Gold Loan Interest Rates?
Unlike a personal loan, only a few limited factors could impact the interest rate:
A. External Lending Rates: When RBI modifies its policy rates, gold loan interest rates also change.
B. Loan to Value Ratio (LTV): The tenure and loan amount play a key role in deciding the interest rate. The higher the LTV ratio, the higher the risk for lenders. In such cases, lenders may levy higher interest rates.
Situations When A Gold Loan Can Help
Indian weddings typically take place during the festive season, so you might need some extra funds to meet your unexpected expenses on shopping and even emergencies. As such, a gold loan could come in handy.
Between 2016 and 2020, at least 195 patients received treatment for burn injuries three days before and after Diwali. Of which 54.3 per cent, or 106 cases, were firecracker-related injuries. Gold loans may be useful in such cases to meet these expenses," says Rajesh Shet, co-founder and CEO of SahiBandhu, a gold loan platform promoted by The Manipal Group.
Gold loans are also used to pay the margin money for buying vehicles and home loans. "You could take a goal loan rather than using your credit card or applying for a personal loan with a high-interest rate. Gold loans have much lower interest rates," added Shet.
