Gold Loan: Is It a Secured or Unsecured Loan?
1. Introduction
- Briefly explain what a gold loan is.
Gold loan is a type of secured or asset-backed lending where the borrower’s gold serves as a collateral to secure loan from a lender. The gold serves as a security for the lender, in a way that in a case of default by the borrower, the lender can liquidate the gold to recover their losses. The commercials of a gold loans are not different from traditional loans where the borrower is supposed to pay an interest component to the lender as stipulated in the loan contract, and upon repayment of liability in full (including principal, interest, and any other charges as per the charge schedule), the lender gives back the possession of the gold to the borrower.
- Why understanding whether it’s secured or unsecured is important for borrowers
Understanding the difference between secured and unsecured loan is extremely important as it essentially is the nature of the loan and dictates the possession of the asset, which can be crucial for the borrower.
2. What Is a Secured Loan?
- Define secured loans : Secured loans as the name suggests are a type of loan which is secured or backed by a collateral. The collateral serves as a security against the lent amount, and can be liquidated by the lender in an event of default on the loan by the borrower.
- Explain how and why require collateral as security : Lending and risk goes hand in hand from a lender’s perspective. There is always a matter of uncertainity whether the lender would be able to recover the entire lent amount or not. To mitigate this risk, the lenders ask for a collateral from the borrower and holds custody until the loan is repaid in full. In an event of default, the lender reserves the right to liquidate the collateralized asset to recover their losses.
- Common examples : Some common examples of collateralized loans include asset backed business loans for machinery and tools, home loans, loan against property, gold loans to name a few!
3. What Is an Unsecured Loan?
- Define unsecured loans : Unsecured loans as the name suggests are loans that are not supported by a collateral. The loans offering is pretty straightforward. A borrower applies for a loan and based on their credit profile, and repayment ability, the lender determines the commercials of the loan and make a call to either disburse the loan amount or not. These loans are not covered by the borrwer’s assets as it is the case with secured loans.
- Few examples : Few notable examples of unsecured loans are personal loans, education loans, credit card loans, medical loans, and many more!
4. Is Gold Loan Secured or Unsecured?
Gold loans are a type of secured loans. This is due to the fact that gold as collateral is amazing due to it’s ability to hold value, and a solid secondary market providing liquidity. These gold loans are backed by the borrower’s gold, i.e. the lender keeps the custody of the borrower’s gold until the loan is repaid in full, including the principal, interest component, and any additional charges as stipulated in the loan agreement. Once the repayment is done, the lender gives back the custody to the borrower.
Since, due to the nature of loans being asset backed, it is imperative to ensure that you choose a lender which ensures safety of the collateral while it is in their possession. This is where lender slike indiagold shines. indiagold keeps the gold in safe bank lockers to ensure that your gold is in the safest hand. Moreover, the pledged gold collateral is also insured to add another layer of safety which helps the borrowers be at peace!
5. Why are Gold Loans Secured
- Collateral-backed – Gold as an investment has been able to produce stable and consistently growing returns over a long investment horizon. The metal also has a pretty solid demand in the secondary market which provides it liquidity, and makes it a fantastic investment. Due to these qualities, gold acts as security for the loan.
- Lower interest rates – Since gold loans are backed by security i.e. the lender reserves the right to liquidate gold in an event of default by the borrower, the risk exposure of the lender decreases considerably, and they’re able to pass on this benefit to the borrower. This contributes to a lower interest rates in gold loans. Lenders like indiagold offers extremely competitive gold loan rates in the industry!
- Quick approval – Gold’s market value determines the amount of loan that can be disbursed. Since gold’s quality and weight can be checked in a matter of minutes, it is extremely easy to also determine the market value of the collateral and thus it can be easily verified and approval can be given quickly.
- Safe for both lender and borrower – Gold loan are a safe option for both lender as well as the borrower. The borrower is able to avail a loan without going through the hassle of a lengthy viability and assessment checks as seen with unsecured loans since gold loan eligibility checks is pretty straightforward and quick, and the lenders are able to minimize their risk exposure since they hold the custody of the collateral, and can liquidate the same to recover their dues in an event of default. Once thee loan is settled, the borrwer gets back their collateralized gold.
6. Difference Between Gold Loans and Unsecured Loans
| Feature | Gold Loan (Secured) | Personal Loan (Unsecured) | | ----- | ----- | ----- | | Collateral | Required (gold) | Not required | | Interest Rate | Lower | Higher | | Loan Amount | Based on gold value | Based on income/credit score | | Approval Time | Fast | Moderate | | Risk for Borrower | Gold may be sold on default | Credit score impact only |
7. Benefits of Taking a Secured Gold Loan
- Lower interest and flexible repayment : Few of the key benefits of gold loans is the fact that these loans are offered at a lower interest rates as compared to traditional forms of loans such as personal loans. Gold loan interest rates are extremely competitive and modern lenders like indiagold extremely lucrative interest rates on their flagship gold loan offering. Also, the borrowers can choose a flexible repayment plan which suits their repayment capacity. There are various repayment plans available in the market such as monthly interest plans, bullet payment plans, EMI option, among others.
- No need for a strong credit history : One of the main selling point of gold loans is the fact that availing these loans is not dependent on the borrower’s credit score of credit history. The only important thing is the value of the gold which determines the amount of loan that can be availed. Borrower’s without an ideal credit history can also avail gold loans with ease!
- Continued ownership of gold (temporarily pledged) : even though the custody of the gold remains with the lender till the time the entire repayment is made, the legal ownership rests with the borrower. This means that even though you do not physically possess the gold, you still are the rightful owner of the gold.
