Mandatory Things One Should Consider Before Taking a Gold Loan
1. Introduction
- Brief overview of gold loans
Gold loans are collateral backed lending products where the borrower’s gold serves as a collateral for the loan. The purpose of this collateral is to decrease the lender’s risk exposure with lending to the borrower as the lender reserves the right to liquidate the collateral to recover dues in an event of a default by the borrower. However, this benefit of the lesser risk exposure is passed down to the borrower too in the form of loans with low interest rates, less stringent credit checkers, low barriers to avail the loans - i.e. lax document requirement among many more!
- Common reasons people opt for them
Gold loans have been extremely famous forms of lending in the country. These loans have become a preferred source of lending for the borrowers as it offers unmatched benefits when compared to traditional forms of loans such as personal loans. Gold loans lenders like indiagold offers benefits such as low interest rates starting at just 0.85%* per month, quick processing, low gold loan documentation requirements, no requirement for favorable credit history, quick processing, and many more! These additional benefits, and relaxed gold loan eligibility criteria make gold loans one of the most sought after types of loans in India.
- Importance of understanding key aspects before applying
Be it any loan, having a clear idea of what you’re getting into always helps. Knowing the niti gritties of the loan like the applicable gold loan interest rates, charge schedule, and any one time charges can be of massive help as this can give a clear picture of the possible charges that one could incur.
2. What is a Gold Loan?
- Basic explanation of how gold loans work
Gold loans are collateral backed lending products where the borrower’s gold serves as a collateral to secure a loan. The borrower is supposed to pay the applicable interest as per the loan agreement, and once the loan is repaid in full including the applicable interest amount, principal as well as any applicable charges, the loan is closed and the gold collateral is handed back to the lender.
- Types of lenders that offer gold loans
Gold loan is a well known and mature lending product in the Indian lending space. There are various types of lenders who offer gold loans, these include lenders from both organized as well as the unorganized sectors. Lenders in the unorganized sector include private money lenders, jewellers, or a lender-borrower pair who are willing to get into an agreement of gold backed lending.
In the organized sector, there are lenders like Banks, and NBFC’s. Lenders like indiagold in the organized sector offer highly customer centric gold loan solutions.
It is advisable to always opt for a loan from lenders in the organized sector as it offers a higher customer security as these lenders are governed by regulators and the contract is enforceable and the lending service provided is highly professional.
3. Gold Loan Loan-to-Value (LTV) Ratio
- Meaning of LTV
LTV stands for Loan to value. It is a ratio which determines the amount of loan that can be relayed to the borrower in relation to the value of their gold collateral. The loan to value ratio is one of the most important matrices from the lender’s perspective as it influences their risk exposure. From a borrower’s perspective, it is beneficial to opt for lenders who offer a high loan to value ratio on the collateral. As per the guidelines by the Reserve Bank of India (RBI) the maximum loan to value ratio for gold loans can be 75% which means for a collateral with a market value of INR 1,00,000 the maximum loan that can be availed is INR 75,000.
Choosing lenders on the basis of the LTV offered can be useful if you’re looking to gat maximum loan against your
collateral. Lenders like indiagold are one of the market leaders who offer a high LTV consistently.
- How the value of your gold affects the loan amount
The lenders ask for collateral to minimize their risk exposure. Having a collateral allows the lenders to liquidate the collateral to recover any dues in an event of a default by the borrower. Hence, the value of the collateral is a major determinant that affects the gold loan amount that can be availed. The lenders have a measure called LTV which determines the maximum amount of loan against the value of the collateral. The borrowers can choose to borrow an amount lower than the one calculated using the lender's LTV offering but cannot exceed it. This ensures that the lender’s risk exposure does not increase dramatically as gold’s price fluctuates and ensuring risk exposure is at the desired level is already difficult.
4. Interest Rates
- How gold loan interest rates vary across lenders
Interest rates offered by the lenders are dictated by their lending policy and the risk exposure. Hence, it is different for every lender. For borrowers whose top priority is to get cost effective loans, borrowing from the borrowers offering low interest rates should be the priority.
- Importance of comparing rates
Comparing rates is a must do practice if you’re someone looking for low cost loans in the market. By doing so you can ensure that you’d be able to secure the most cost effective loan. You can compare loans online by checking the offered rate by several lenders or by checking if the lenders are running a special offer.
- Types of interest rate structures
There are several types of interest rate structures available in the market. Most common one being flat or fixed interest rate where the borrower is supposed to pay a fixed interest to the lender till the loan is closed and the rates are not bound to change throughout the loan tenure. Another rate structure being floating interest rate structure, where the rate is pegged to an underlying rate with a fixed margin, as and when the underlying rate changes, so does the applicable rate of interest of the loan.
5. Eligibility Criteria
- Who can apply for a gold loan : The eligibility criteria for gold loan is comparatively relaxed as compared to the other traditional forms of lending like personal loans. All that one needs is a valid id proof, a photograph. PAN card, and gold to collateralize.
- Acceptable forms of gold and borrower requirements : Not all types of gold are acceptable for borrowing a gold loan. The lenders usually keep a minimum requirement to weed out the unwanted borrowers. Requirements such as hold plated jewellery is not accepted for gold loans, low purity gold such as 10 karat or 14 karat is also not acceptable to borrow. Other borrower requirements may include requirements such as proof of income, address proof, capping on loan to value ratio, and much more!
6. Required Documentation
- Common documents needed (ID proof, address proof, etc.) : Some of the most common documents required for availing a gold loan are ID proof like aadhaar or PAN card, address proof such as light or telephone bill, and in some cases income proof such as salary slips, or ITR returns.
- Additional documents that may be requested : The lender may require some additional documents such as income proof, to ensure that the money lent is given to the eligible person.
7. Loan Tenure and Gold Loan Repayment Options
- Available loan durations : In most cases the loan duration is up to 12 months, however the gold loan tenure options may be case dependent where the tenure is agreed between the borrower and the lender.
- Repayment modes such as EMI or bullet repayment : There are various repayment modes available with various lenders such as EMI or bullet payments. In EMI mode of repayment, the applicable interest is calculated on the basis of the principal and the loan tenure and the total liability is divided equally throughout the loan tenure, essentially allowing the borrower to repay the entire liability throughout the loan tenure with no residual balance. In the bullet payments mode of repayment, the borrower is only supposed to pay interest on a monthly basis, and can make partial repayment towards the outstanding principal as and when they have the bandwidth to do so. This allows for a greater flexibility and gives the borrowers the headspace to repay as per their convenience.
- Considerations when choosing a repayment plan : There are several considerations that a borrower should take into account while choosing a repayment plan. The first and foremost being if they’d be able to make regular payments or would like a more relaxed repayment method as their incoming funds might be unpredictable. Another key consideration is the tenure of the loan. For a longer tenure loan it makes sense to take the EMI option and for shorter tenure, bullet payment loan repayment structure would be more suited.
8. Safety and Security of Gold
- How and where pledged gold is stored : The collateralized gold is stored at the lender’s locker and storage facility which is absolutely safe. In case if the lenders are banks then banks often store the pledged gold in the lockers / vaults, making it safer than storing it at home. This is where modern lenders like indiagold shines. indiagold offers secure gold storage in vaults and also insure the gold collateral, which essentially mitigates the risk associated with storage.
- Insurance or protection measures by lenders : Few lenders like indiagold offers insurance on the collateralized gold to ensure that the borrower’s risk exposure with respect to safety i.e. giving the custody of their gold to the lender is mitigated. Having the collateralized gold insured can really help not only with the safety of the collateral but also with the peace of mind that the gold is safe!
- Importance of choosing a reputed institution : It is extremely important to choose a reputed lender. Choosing lenders like indiagold with a solid track record and product offering ensures that you get the best gold loan deal while having your gold as safe as possible!
9. Additional Charges and Fees
- Possible costs beyond interest (processing, valuation, etc.) : More often than not, the borrowers are not aware of the charge schedule beyond the applicable interest rate. This can catch the borrower by surprise when the charges are levied. Charges such as gold loan processing fees, missed or late repayment fees, gold loan prepayment penalties, etc are some of the most common types of charges that are levied on the loan.
- Understanding the fine print : To ensure that the charges don’t catch you by surprise, one should always read the loan document carefully. Quite often many lenders hide the charges in fine print of the lending terms which is often skipped by the borrowers however it is enforceable. This is why choosing reliable lenders like indiagold is important as there are no gold loan hidden charges with loan from indiagold.
10. Effect on Credit Score
- Whether gold loans impact credit history : Although one does not require a credit score or a solid credit history to avail a gold loan, however missing repayments can most certainly impact the borrower’s credit score. So does repaying the loan on time. Responsible borrowing can help build a good credit profile over time which is extremely useful if one plans to avail a loan in the future.
- Consequences of missed repayments : Missing loan repayments can have a detrimental effect on your credit profile. Missing repayments imply the fact that the borrower does not borrow responsibly or has borrowed more than their repayment capacity. This is not desirable from the lender’s perspective as it increases their risk exposure.Hence, if you wish to borrow in future, missing repayments of the existing loan is a big no.
11. Alternatives to Gold Loans
- Other financing options to consider : Gold loans are one of the most versatile and borrower friendly lending products available in the market. However the only barrier to availing a gold loan is that the prospective borrower should have gold to collateralize. If the borrower is unable to collateralize gold then they can opt for other lending products such as personal loans, however these may come with stricter assessment criteria, and there are chances of loan rejection too.
- Situations where gold loans are more suitable : Situations where the borrower needs a cash injection on an urgent basis, or if there is a requirement for a low cost loan, or even if the borrower does not have a solid credit score, or credit history in place.
12. Tips for First-Time Borrowers
- Things to do before applying : Once you have figured out your requirements, your non-negotiables in terms of gold loan and shortlisted the lender, one of the first things that you can do before applying is to ensure that all the required documents are in place, and the gold collateral is ready. Make sure that the gold is clean and you have the required purity certificate in case you need it at the time of assessment.
- Common mistakes to avoid : One of the most common mistakes that the borrowers end up committing is that they don’t read the loan document carefully, which leads to unpleasant surprises later. Make sure that you read the terms and conditions carefully, check your repayment capacity based on your other financial commitments and borrow responsibly.
