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Gold Loans   As gold loans offer flexible repayment options, these can help those facing a temporary cash crunch.   As an asset, gold is almost as liquid as cash. You can unlock the value of your holding with a loan whenever you are in need. In fact, gold loan companies promise that you can bring your gold and walk out with cash in a matter of minutes. While it may not be as simple as that, a loan against gold does not have too many hurdles. Almost all forms of gold can be pledged, including bars, coins and ornaments. The lender will get the gold tested for purity and, accordingly, extend up to 75% of the gold value as loan. Experts say it is not a good idea to take the maximum 75% as loan. The interest rate on any loan is determined by the risk associated with it. So, a lower loan amount (say, 50-60% of the gold value) reduces the risk for the lender and could lead to a lower rate of interest. As the borrower is giving a collateral (a highly liquid one), gold loans are cheaper than unsecured personal loans. The interest rate on a personal loan can be as high as 2024%, while a one-year gold loan will charge only 11-15%. In cases where the tenure of the loan is very long, say 4-5 years, the interest rate is higher at 18-20% (see table). Repayment options There are several repayment options for borrowers. Traditional moneylenders take a lump sum along with interest at the end of the tenure. This is not cost-effective for the borrower since the interest rate can be as high as 24-30% per annum. The other option is to pay a simple interest on the loan every month. At 1.2-1.85% a month, the interest is not low. The annualised rate comes to 14-18%. However, this mode works well for borrowers who are faced with a temporary cash crunch and are likely to be able to repay the entire amount after a few months. The EMI option suits borrowers who will not be able to repay the amount as a lump sum. For them, monthly repayment is a better option. The interest rate is also lower in this option because the risk for the lender comes down with every EMI payment. What to watch out for Like any other loan, gold loan requires disciplined servicing of repayment. If you fail to pay by due date, the lender might slap a 2-3% penalty. This may not sound too bad, but if you skip more than three payments, it can turn ugly. Go through the terms and conditions of the loan agreement. Most of them have a clause saying that the lender can sell your gold to recover his dues after a grace period of 90 days. This can be devastating if the pledged gold was an heirloom or something of great sentimental value. Also, watch out for the other clauses that lenders slip into the terms and conditions. Avoid those who charge a very high processing fee or levy a stiff penalty on prepayment. The processing fee should be in the range of 0.5% to 2% of the loan amount, while the penalty should not exceed 2%. Some lenders also charge 0.25% for valuation. Gold loans are cheaper than personal loans and credit card advances, but one can also consider loans against securities and insurance policies. These loans are comparatively cheaper and have more customer friendly terms and conditions

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