Is It Possible To Get An Interest-Free Gold Loan?
I. Introduction
- Brief explanation of what a gold loan is
Gold loan is a collateral based lending product, where the borrower gives the custody of their gold to the lender with an aim to secure the loan. The lender provides loans and earns income in the form of interest. The motive behind collateralizing the gold is to subside the lender's risk associated with default by the borrower, as in case of collateral backed loans, the lenders reserve the right to liquidate the collateral to recover any dues in case of default.
- Growing popularity of gold loans in times of financial need
Gold loans have been a well known and highly utilized form of loans in the country. Gold is a fantastic collateral due to its price stability, and high liquidity in the secondary market. For borrowers too, gold loan is a fantastic option to secure a loan, as compared to the traditional lending products like personal loan, etc. Availing a gold loan is fairly easy, involves minimal paperwork, and much more! Lenders like indiagold offers quick processing, disbursal in under 30 minutes, a high loan to value ratio, and other customer centric features which makes gold loan a highly desirable lending product in the market, especially for those who either have a low credit score, or a relatively new credit profile which makes it difficult for them to secure other forms of loans.
- Introduction to the concept of "interest-free" loans
Lending from a lender’s perspective comes with various kinds of risks like default risk, late payment risks, market risks, among many others. To cover for these risks, the lenders earn income on their capital in the form of interest charged to the borrowers.
Conceptually, interest-free loans are the loans where the lenders don’t charge the borrowers any interest on the loan. The most common interest free loans are centred towards pushing borrowers to purchase consumer products, where an availability of interest free loan can influence their decision to make the purchase. Lenders make income on such loans in the form of charges like processing fees to the borrower, and subsequently a commission from the seller of the consumer products.
- Core question: Can gold loans be truly interest-free?
As highlighted earlier, the interest-free loans are a usual occurrence in the consumer products market, where the lenders can cover their lending risk and expenses by charging commission to the sellers, in case of gold loans that is not feasible. As lenders are essentially directly lending the money to the borrower with no referral or commission fee in place.
- Explanation of the gold loan process.
- Pledging gold as collateral
The most important step to avail a gold loan is to pledge the gold to the lender. In this process, the borrower gives their gold to the lender. The lender first assesses the gold collateral, and based on various factors like the purity, weight, and the prevailing gold rate; the lending amount is calculated. Upon agreement by the borrower, the lender takes possession of the gold and releases the fund. The gold stays in the lender’s custody till the loan is paid in full and the loan is closed. Once repaid and closed, the lender hands back the gold collateral to the erstwhile borrower.
- Loan amount based on the gold’s value
Loan amount is dependent on the value of the gold collateral. This value is determined by taking various factors into account like the weight of the hold, the purity level, the market price, as well as the loan to value ratio (LTV) offered by the lender. Collectively these factors help the lender decide the maximum amount that can be given as a gold loan for that specific gold collateral. Loans of a lower amount can be released, however the total loan amount cannot exceed the loan amount calculated based on maximum LTV by the lender.
- Repayment structure and interest components
Most lenders offer monthly interest repayment structure, however some offer various repayment structures such as Equated Monthly Installment (EMI), Bullet Payments, etc. under the monthly interest structure, the borrower is obligated to pay only the interest component on a monthly basis and repay the principal amount at the time of loan closure. Under EMI structure, a final repayment plan is decided which is to be paid on a monthly basis. This includes both interest as well as the principal component, and over the loan tenure, both interest and principal is paid in full. Under Bullet repayment structure, the borrower can make repayment towards their outstanding principal while paying regular interest payments.
- Typical interest rates in the market
Interest rates are to the lender’s prerogative, there are many lenders offering competitive interest rates. Like indiagold offers gold loans starting at just 0.85%* per month making it one of the most affordable gold loans available in the market.
III. What Does “Interest-Free” Really Mean?
- Definitions and interpretations:
- No interest at all : In simpler terms, no-interest loan implies that the lender offering the loan will not charge any interest on the same, i.e. the borrower is liable to only pay the amount that he / she borrowed from the lender.
- Zero interest for a promotional period : Quite often, some lenders run a promotional period during which they may offer attractive offers like low interest rates, or even no-interest rate loans. However, it is recommended that one should clearly understand the terms for interest-free gold loans before opting for one.
- Low processing fees as a substitute for interest : Sometimes, the lenders may offer a scheme in which the processing fee is lowered or even waived-off to accommodate for the cost incurred as interest payment.
- Marketing vs. reality: how some offers may be misleading.
More often than not, many lenders run these promotional offers as a marketing gimmick to attract more borrowers, and in reality, the offer has some terms and conditions which essentially makes the borrower pay in other forms of charges like higher processing fee, additional application fees, among others.
IV. Scenarios Where Gold Loans Appear “Interest-Free”
- 1. Promotional Offers
- Limited-time zero interest schemes by NBFCs or fintech lenders. As part of these schemes, to widen the customer base, and increase the brand visibility, the lender may offer limited time offers offering zero-interest rate schemes, however the returns are usually made in some other shape and form like processing fee, or some sort of ceiling on the free-interest rate, post which the rates applies.
- 2. Loans from Cooperative Societies or Credit Unions
- Lower or zero interest options for members. These credit societies may offer lower or zero interest loans to its members to provide a supportive environment, where the borrower can make use of the funds efficiently and grow their business or for other requirements they may have.
- 3. Gold Loan from Friends/Family or Informal Sources
- May involve no interest but comes with personal risk. Such loans if not serviced on time may strain personal relationships, and can result in a socially awkward position. Borrowing from professional lenders ensures that all the terms and conditions are laid out on a contract and there’s no ambiguity.
- 4. Subsidies from Religious/Charitable Trusts
- Some organizations offer zero-cost lending in emergencies. These are usually charitable or religious trusts, and these funds are specifically earmarked for emergencies, and the borrower has to produce the necessary proof to avail the funds.
V. The Hidden Costs
- Processing fees : Processing fee is a type of fee charged by the lender to start a gold loan application, this cost is often unaccounted for by the borrower, and this impacts the total cost of borrowing. It is important to note the applicable charges to ensure that there are no surprises.
- Valuation and storage charges : Quite often, there is a variance between the valuation and storage charges offered on gold loans by different lenders. These additional costs can significantly boost the cost of borrowing for the borrower. It is recommended to choose a lender based on their charge structure apart from the usual gold loan interest rate comparison.
- Penal interest on delayed payments : penal charges can significantly boost the total cost of borrowing. These charges are applicable in case of late repayment or missed payment as per the scheduled repayment date. Repayment charges can increase exponentially in case the delay in repayment keeps on increasing. These charges usually vary as per the lender, hence it is important to read the charges in detail before taking a gold loan.
- Prepayment or foreclosure charges : Prepayment or foreclosure charges apply in case the borrower wishes to repay the loan amount early and close the lending relationship with the lender before the schedule. These charges often go unaccounted before availing a gold loan.
VI. Pros and Cons of Seeking Interest-Free Gold Loans
- Pros:
- Short-term relief : interest free gold loans can provide short term relief to the borrowers as they are not liable to pay interest component on the loan, however additional charges like processing charges, repayment charges, etc. and the principal amount is to be repaid as per the repayment schedule/
- Potential savings on interest : Not considering the other costs of borrowing, a gold-backed loans with no interest charges can help save on interest charges. However, it is important to note that no other charges are waived.
- Cons:
- Limited availability : One of the cons with non-interest gold loans is that these are very limited, and are usually run as a part of a promotional event to attract potential customers. Not all borrowers would be able to secure a no-interest gold loan, and the chances of one securing such a deal is very low, considering these offers are not only limited in time, but also the number of customers that can avail the offers!
- Hidden fees : Lending is not free. The interest is charged to accommodate for the risk taken by the lender with lending to a borrower. With non-interest gold loans, since the borrower would not be paying interest on the loan, they however would still be liable to pay other associated charges such as processing fees, late fees, etc. and in many cases, these fees are inflated to adjust for the loss of revenue for the lenders.
- Risk of misunderstanding terms : This is a very real risk, and quite often the borrowers are a prey to this. To avail maximum benefits, it is important to fully understand the terms and conditions of loan, and its associated charges. Failing to do so may result in unanticipated financial loss, and higher cost of borrowing.
VII. Alternative Low-Cost Gold Loan Options
- Government-backed schemes : While gold loan with zero interest may not be available, there are plenty of alternatives that are available for the borrowers, which can help save massive costs on borrowing. Borrowers can check if there are any government run schemes that can help reduce the cost of capital, and secure lending at a lower cost.
- Transparent lenders with low interest and no hidden fees : There are plenty of honest lenders in the market, who may not run a scheme of interest-free gold loans, but may offer loans which are cost effective and the features that are extremely customer centric. Borrowers can understand their needs and the loan features that are really important to them, and check if a lender is offering such features at a low interest rate.
- Digital gold loans with competitive rates : Gone are the days, when you needed to make an actual visit to the lender’s office to check the scheme run by them or the prevailing gold loan rates, now you can make a comparison online. Lenders run promotional schemes, or post information about their gold loan rates, online, and many lenders like indiagold have a completely digital process, making the borrower’s life easy by providing end to end customer centric offers.
VIII. Tips for Borrowers
- Read the fine print of “interest-free” claims : More often than not, the no-interest scheme is just a marketing ploy to attract more borrowers. There can be fine print which can essentially result in the offering getting void. Hence, it is important to read the fine print and truly understand the interest-free claims, speak with the representative to ensure that you completely understand the claims. Also, to avoid such pitfalls, it is important to only borrow from trusted lenders such as indiagold.
- Compare total cost of borrowing, not just interest : Total cost of borrowing is the sum of all the costs associated with borrowing during the entire lifecycle of the loan. It includes the total interest paid on the loan, any additional processing fees, file charges, etc. To ensure that you get the best possible deal in the market, you can compare various lenders and their offers, and choose the one that helps you save the maximum cost money on borrowing. Lenders like indiagold offers low cost gold loans starting at just 0.85%* per month!
- Prioritize regulated lenders : Gold loans as a lending product is facilitated by lenders in both formal as well as informal sectors. While choosing a lender is solely to the borrower’s discretion, it is important to note that choosing a reliable lender in the formal sector makes much more difference as doing so can help ensure that the gold is secure while it is in the lender’s custody. For example, indiagold keeps the collateralized gold in secured vaults, and also insures the collateralized gold, to ensure that the borrowers remain worry-free about the security of their gold.
- Understand your repayment capacity : Understanding the repayment capacity is absolutely essential while availing a loan. By doing so, the borrowers ensure that they are only taking a loan under their repayment capacity, which decreases the chances of over-borrowing, and essentially missed repayments, and defaults on loans.
