The gold loan market in India has a very old history.
Besides any other reason for the Indians to invest in gold, the ease with which you can get a loan against your the gold holdings plays a significant role.
Gold loans have been prevalent in the Indian system from a very long time.
Remember Sukhi Lala of iconic movie Mother India who was one such money lender who used to mortgage jewellery/ valuables and lend money on interest. It was the time when there was no such investment avenues like today and people used to invest their surplus money either in gold or property. So in case of any emergency, it was the gold loan which was resorted to for arranging such emergency funds.
Very recently this space has been occupied by a few banks and NBFCs who are very active in the market. Gold loans are provided on the basis of the value of the ornaments. The lenders charge the interest on gold loans on the basis of the ratio of the loan to the value of the gold ornaments which is popularly known as ?? LTV Ratio??. Higher the LTV, higher the rate of interest charged by the lender as he is left with lower margin.
Lenders earlier used to finance up to 90% of the value of gold jewelry / ornaments. However with the latest RBI instructions, now the Gold loan companies have been instructed not to lend beyond 60% of the value of the ornament. Depending on the LTV, the rate of interest ranges between 12% - 28% p.a.
Gold loans typically are for the duration of one year and the duration can be further extended at the prevalent rate of that time. During the period you are supposed to pay the interest regularly.
The Gold loans are generally compared with personal loans . However gold loans score over personal loans on several counts. First the processing time for gold loans is very short as compared to personal loans. Secondly since the gold loans are fully backed by tangible assets, the lender is least bothered about the creditworthiness of the borrower as long as the lender satisfies himself about ownership of the gold ornaments and retains a reasonable margin. Thirdly the rate of interest charged on gold loan is lower than personal loans.
In case you want to take gold loan, walk into any branch office of the lender along with your gold jewelry. The lender will evaluate your jewelry and will provide the loan based on their valuation rather than the cost mentioned in your purchase bill.
Muthoot Finance and Manapurram Finance are two very active players in loan against gold jewelry. Banks like HDFC Bank, State Bank of Travancore, Central Bank of India and Indian Overseas Bank also provide these loans. Remember lower the amounts of loan you take per gram, lower will be your interest rate.
The NBFCs are not allowed to sanction gold loan against any bullions i.e. gold bar and gold coins. Thus they can only lend against gold ornaments. This restriction ensures that default rate on gold loans is minimal as the buyer has a sentimental attachment with the gold ornaments. Moreover the actual cost to the borrower is higher than the actual gold component in the ornaments thus effectively the money lent is on lower side as compared to the perceived value or replacement cost to the borrower as the lender only considers the value of the pure gold while granting gold loans.
Thus gold loan is a product which is evergreen due to its various positive features like ease to obtain and relatively lower rate of interest.
However in case the gold prices come down drastically then only companies engaged in gold loan business will suffer, otherwise they only have one way to go and i.e. up and up.
Gold Loan Queries.
2. Loan against gold has gained immense popularity in the recent times. What makes it score over other sources of funding? What is typically the rate of interest on a gold loan?
Gold loans - quick (within a few hours to a maximum of one day), easy local availability at a local branch near you, available irrespective of credit history and best of all at reasonable rates of interest especially if the amount borrowed does not exceed 50-60% of the market value of the jewelry. Also repayment can be structured as just interest amount with principal being repaid at the end of the period in one lump sum. Thus regular payments can be smaller than what an EMI would be for the same period. For example if you took a interest only loan of Rs. 2 lakhs for 2 years at 12% your monthly payment will be Rs. 2000/- for 2 years but you will need to repay the loan with a lump sum payment of Rs. 2 lakhs at the end fo 2 years whereas the EMI for a 2 year loan at the same interest rate would be around Rs. 9400 (of course the loan is repaid at the end of 24 installments so there is no lump sum payment at the end of 24 months).
3. What are the different ways in which a loan can be secured by pledging gold? Which is the best option among them and why?
If the need for speed is not paramount (i.e. you can wait for a day or two) you should look at private sector and public sector banks which provide these loans at a more reasonable rates of interest . Also if you can restrict your loan amount to around 50% of the market value of the jewelry than the interest rates are most reasonable. The process is fairly streamlined with the jewelry assessor sitting in the lenders branch itself or available very near the branch where it is valued and then your jewelry is sealed in a pouch in your presence.
Additional Input
4) Typically jewelry is an item of personal use and its emotional value is sometime far higher than its market value. If for any reason you are unable to pay pack the loan the lender can sell your jewelry in the market to recover its dues after which you can never get your jewelry back.
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