Why Is It A Good Loan?:
Loans against gold are cheaper and better than personal loans as the former are available at lower interest rates. In contrast, the interest rates on personal loans are not standardised and can vary from bank to bank. Also, a personal loan depends on a host of factors including, the borrower's salary, profession and the purpose for which the loan is being taken.
For instance, the interest rate on a personal loan of 5 lakh falls in a wide range of 15-30%. But loans against gold are available for as low as 11%. Secured borrowing such as a loan against gold, investments or property is cheaper because it is backed by some assets, which command a good value at any point of time. If the borrower defaults on the loan, the banks can liquidate the assets to settle the loan account.
Being a secured loan, the risk of default and credit losses is significantly lower in this loan compared to other forms of loan for personal use. Given the lower risk, gold loans come at a lower cost than other forms of personal loans.
Also, within the gamut of secured loans, a loan against gold has its own advantages. You get higher loans against your gold compared to loans against securities.
For loans against securities, you can borrow only up to 50% of the value of your shares or your equity mutual funds. A loan against property is a good option only if you need a big amount. Otherwise, it doesn't make financial sense to mortgage your property for short-term liquidity needs.
So, if the value of your shares is 1 lakh, you are likely to get a loan of only up to 50,000 against them. In case of gold loans, this proportion is greater.
A Look at Gold Loans:
Banks and non-banking finance companies (NBFCs) such as Muthoot Finance, Muthoot Pappachan Group, Manappuram Finance are active players in the gold-loan segment. Once you pledge the gold, you will get a loan amount of 70-95% of its value. The bank/NBFC carries out a valuation of the gold by a set of professionals who follow traditional methods of checking gold. It can include just rubbing the metal and using the caratmeter.
The bank or NBFC keeps the gold in its possession until the borrower pays off the dues. But is it safe to park one's jewellery with banks and NBFCs? The gold jewellery is sealed in a tamper-proof manner in front of the customer and kept in the bank's safe deposit. In fact, the Reserve Bank of India (RBI) has introduced specific guidelines and standard practices for bank lockers. The NBFCs have no stipulations on lockers. But even we maintain the same locker requirements as banks, given the risks associated with the precious yellow metal. It is our bread and butter and we cannot afford to compromise on safety measures
The maximum tenure for these loans is three years and the interest rate falls in the range of 11-20%. The rate largely depends on how much security (in this case, the gold jewellery/coins/bars) the borrower leaves with the bank. Also, repayment can be structured as per the borrower's convenience. One can just pay the interest amount with the principal as a lump sum amount instead of periodic EMIs. After the repayment of the loan, the customer needs to come to the branch to collect the jewellery. The process is simple and the delivery of jewels is done across the table at the branch on repayment of the dues.
Borrow For The Right Reasons:
People may borrow for various reasons such as repayment of a personal loan, unexpected expenses or any other unforeseen event. Often, people also borrow against gold as a bridge loan or for giving the down payment for big purchases such as a car or a home. But you should avoid using gold to borrow for margin money as you would have to repay the two loans on a single salary. That could dent your personal finances. Also, people should raise the loan against gold to the extent of their repaying capacity and not to the extent of the value of gold. In case one needs a higher amount and knows that he cannot repay the loan, it's better to raise the fund by selling the gold instead of raising a loan against it.
Gold loans are hassle-free and are available at the shortest possible time. But check the end use of these loans. It shouldn't happen that you have to forgo your spouse's wedding jewellery for some consumption needs if you are unable to repay the loan.
The Gold Exchange
1 Banks usually lend only against jewellery
2 Restrict the loan amount to your repayment capacity, not the value of gold
3 Once you pledge your gold, you will get a 70-95% loan against its value
4 Professional examiners check the gold in the customer's presence at the bank
5 The mortgaged gold jewellery is sealed in a tamper-proof pack and kept in the safe deposit
6 The jewellery is returned at the bank branch on repayment of the loan
7 There is no prepayment penalty on gold loans
