Gold Loans Explained: A Flexible Solution for Those in Need of Quick Cash
What is a Gold Loan?
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Definition and basic concept of using gold as collateral for a loan
Gold loan, as the name suggests involves transactions where gold is involved in some capacity. Contrary to what some may think, it is not a loan availed by an individual to buy gold, rather a short term loan availed by a borrower by keeping their gold as a collateral with the lender. This bodes well for both - The lender, as well as the borrower. For the lender, giving a collateral backed loan helps secure the loan, essentially decreasing the risk associated with non-repayment, as the lender would reserve the right to liquidate the collateral to recover dues (if any). For the borrower, availing a collateral backed loan is easy to secure, and more often than not, with favourable terms and conditions. So it is a win-win situation for both!
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How it differs from traditional loans
Gold loans are not very different from traditional loans. In context to the comparison with lending in the unorganized space, historically giving a loan with a collateral in place is not a new practice. This has been followed with all sorts of collaterals like gold, land, house, and other items of value. However, with ever evolving lending space, the gold loans have also evolved into a much more organized lending practice. Now the lenders and borrowers enter into an official contract, with lending terms and conditions properly chalked out, and pretty much standard practices, and regulations applying to all lenders and borrowers in the market alike.
How Gold Loans Work
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Process: Valuing gold, loan amount calculation, and disbursal
The process of availing a gold loan is fairly straightforward, and quick. Once, the borrower has decided upon the requirement, and the gold ornament/utensil, etc. which is to be given as a collateral, they simply need to make a visit to the lender’s office, where the lender will first do the assessment of the collateral. In the assessment process, the lender will check for the purity of the collateral, its weight, and some other basic checks to ensure that the ornament is fit to be collateralized, then based on the current gold price, the lender will put a valuation on the gold. Once, the gold’s appraised value is determined, then based on the applicable Loan to value (LTV) ratio applicable, will the lender give a final quote of the amount that can be availed as a loan.
If it is in sync with the borrower’s need, then further calculations such as applicable interest rates, etc. will be chalked out and a contract will be signed. Upon signing the contract, the lender will take possession of the gold, and disburse the loan amount to the borrower. IndiaGold offers home collection of gold, and loan disbursal in under 30 minutes making it a no brainer for the borrowers to choose them!
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Typical loan tenure and interest rates
Loan tenure and interest rates may vary from lender to lender and are called out in the contract while drawing the contract at the time of availing the loan. Typically the loan tenure is kept at 1 year, with an option to renew it if the borrower is unable to repay the entire principal amount within the stipulated timeframe, required the borrower is making timely interest payments. Interest rates usually rides upon various factors such as the collateral, loan amount, borrower’s credit profile, lender’s policies, and promotional schemes (If any).
As a borrower, it is imperative to make a fair assessment of the loan interest rates and general terms offered by the lenders, and make a calculated call while borrowing.
Why Choose a Gold Loan?
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Quick access to cash with minimal documentation
One of the most attractive features of a gold loan as a lending product is the convenience it offers to the borrowers. The entire process of availing a gold loan is fairly quick and involves minimal documentation, as opposed to some other lending products like personal loan. This makes a gold loan a perfect choice for ones who are in a very urgent need of funds, and have a gold collateral available.
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Minimal credit score checks
Credit score check is a means for the lenders to assess the creditworthiness of a borrower based on which lending decision is usually taken, as it helps in assessing nonrepayment, or default risks.
Since a gold loan is secured by a collateral (Gold), the lender’s risk exposure is minimal as they have the liberty to liquidate the collateralized asset in case of a default by the borrower. Hence, essentially making the credit assessment necessary however not a very important aspect while making a lending decision. This is why there are minimal credit score checks with gold loans.
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Flexible repayment options
Modern lenders in the gold loan space are now offering flexible repayment options to help the borrowers pay off their debt easily, while maintaining good customer relations. In general there are two types of repayment structures, namely Equated monthly installments (EMI) or Bullet payments. Under EMI repayment structure, the interest, and principal amount is repaid over the loan term in fixed monthly installments, with the borrower reserving the right to be able to make pre-payments in order to close the loan account early. In the bullet repayment structure, the borrower is only obliged to pay the interest component monthly, and they have liberty to pay the principal amount either at the end of the loan term, or can make part early repayment to lower the interest burden.
Advantages of Gold Loans
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Fast approval and lower interest rates compared to unsecured loans
What differentiates gold loans with traditional unsecured loans is the ease of borrowing and borrower friendly terms. Since gold loans are backed by collateral, the lender’s risk exposure on the loan decreases, i.e. the lender can liquidate the gold collateral to recover any dues. This enables the lenders to pass down the benefit to the borrowers in the form of lower interest rates. Lenders like IndiaGold offer interest rates on gold loans starting at 0.8%. Also, as mentioned earlier, since the loan is backed by a collateral, the assessment process gets more efficient, resulting in faster approvals.
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Retain ownership of gold after repayment
One of the major features of gold loans or collateral backed loans is that the loan or collateral serves as a security, i.e. the ownership remains with the borrower and once the loan is repaid in full, the lender will give back the collateral to the borrower. The icing on cake being the fact that the entire process is lightning quick! The borrower gets back their collateral almost instantaneously.
Risks to Consider
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Potential to lose gold if repayment is missed
It is important to note that in case of overdue payments, or default, the lender reserves the right to liquidate the collateral to recover the dues. Hence, it is imperative for the borrowers to make timely repayment as chalked out in the loan agreement. Failing to do so puts the collateral at risk.
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Need for careful loan amount decisions
Another major risk that impacts the borrowers quite often is the fact that the many borrowers tend to take loans of value greater than what is required. This leads to unwanted pressure on the borrower at the time of repayment, and often results in default and subsequently liquidation of the collateral. It is recommended that the borrower only borrow the amount that is required rather than what they are eligible for to avoid such sticky situations.
How to Choose the Best Lender
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Consider interest rates, loan terms, and reputation of lenders
Be it a borrowing decision, or decision regarding any financial matter, it is imperative that the person takes a calculated decision. To enable the same, having information regarding all the deciding factors is important. The borrowers must always consider factors such as interest rates, and loan terms to avoid any surprises later on. Not only this, the lender’s reputation is also important. It is recommended that the borrower choose a highly dependable lender, and read the loan terms and conditions carefully. Lenders like IndiaGold have made their mark in the industry by offering unparalleled services and their customer centricity.
Conclusion
Gold loans are a quick and easy source of funds for the individuals in need of timely financial assistance by collateralizing gold. The process involves assessing the value of gold and subsequently, the loan is disbursed on the value of gold with minimal documentation. Compared to normal loans, gold loans are more economical on the interest side since the risk factor to the lender is low given that the collateral can be liquidated to recover dues in case of default. Repayment is also seamless through alternatives such as Equated Monthly Installments (EMIs) or Bullet payments.
It is recommended that the borrowers should take a loan of only the required sum, since taking a higher loan than required results in financial stress and potentially loss of gold. Though gold loans are a quick source of funds, they are dangerous with a risk of losing the gold in case of default. The borrowers need to take interest rates, conditions, and reputation of the lender into account before availing a gold loan.
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