NBFC Gold Loans vs Bank Gold Loans

1. Introduction

• Brief overview of gold loans as a quick financing option: Gold loans are a type of asset-backed lending product. Here, the borrower gives their gold as collateral to secure a loan from the lender, and once the loan is repaid in full, the lender gives back possession of the collateral to the borrower.

• Growing choice between banks and NBFCs for gold loans: In India, gold loans can be availed by two types of lenders. I.e. either from a bank or a Non-Banking Financial Company (NBFC). Each presents its own set of pros and cons, and in this article, we will discuss the point of differentiation in detail to help you figure out the best choice for you.

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2. Understanding Gold Loans

• What is a gold loan and how it works: Gold loans are a type of asset-backed lending product. With these loans, the borrower secures a loan from the lender by giving them possession of their gold. The collateralised gold helps the lender mitigate risk associated with lending. Once the loan is repaid in full, including the principal, interest component, and any additional charges, the lender gives back possession of the gold to the borrower.

• Common features across banks and NBFCs: Gold loans are a standard loan offering, with not many differences based on the type of lender. Whether it is banks or NBFCs, the primary point of difference between loan offerings is centred on the borrower’s convenience features. For example, indiagold offers gold loans with unmatched customer convenience features, like quick loan assessment and processing, high LTV ratio, flexible repayment plans, and much more!

• Role of RBI regulations in gold lending: The Reserve Bank of India (RBI) is the apex regulator of banks and NBFCs in the country. RBI, as a regulator, ensures that sufficient regulations are put in place and are followed by the lenders. For example, one of the most crucial rules regarding gold loans is the LTV rule, where the lenders cannot lend more than 75% of the value of their gold collateral.

3. What Are Bank Gold Loans?

• Definition and overview: Bank gold loans are standard gold loans offered by banks. These are a pretty straightforward type of gold loans with standard offerings as highlighted earlier.

• Typical interest rates and tenure: The tenure offered by most banks for their standard gold loan offering is 12-24 months, with an option to extend upon agreement. As far as the interest rates are concerned, this can vary between lenders, and the average gold loan interest rates offered by the banks are in the ballpark range of 9-11% per annum.

• Loan-to-value (LTV) limits: As per the Reserve Bank of India (RBI), the maximum loan-to-value ratio (LTV) for gold loans is 75%. All the lenders, irrespective of whether it's a bank or an NBFC, have to follow it. However, there is no lower limit to it, and generally, banks offer a lower LTV on gold loans as compared to the NBFCs.

• General approval and documentation process: General approval and a list of documentation largely remain the same, including the assessment of the gold collateral, KYC documents, and other documents like identity, address, income, etc.

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4. What Are NBFC Gold Loans?

• Definition and overview: NBFC gold loans are gold loans provided by NBFC companies to borrowers.

• How NBFC gold loans differ from banks: The NBFC gold loans differ from banks in terms of the convenience they provide to the borrowers.

• Speed of processing and accessibility: NBFCs provide a superior processing speed and accessibility. Lenders like indiagold offer extremely quick processing and disbursal!

• Focus on specialised gold loan services: while banks offer many lending and cash management services, NBFCs are often concerned with a specialised service. In this case, gold loans. This allows NBFCs to focus on specialised services, which adds to the overall customer satisfaction.

5. Charges and Fees for Gold Loan Comparison

• Processing fees: Processing fees are the fees charged by the lenders to process the gold loan application. It can be different based on the lender, hence it is important to compare the processing fees to ensure that you’re not overpaying.

• Valuation and handling charges: Valuation and handling charges are associated with valuing the gold collateral.

• Foreclosure or prepayment penalties: Foreclosure and prepayment penalties are associated with paying off the gold loan earlier than the schedule. This is put in place by the lenders to discourage the borrowers from prepaying the loan. Comparing gold loans based on this factor can help minimise the cost of the loan in case if you’re planning to close the loan before the stipulated time.

• Transparency in the fee structure: This is one of the most important factors while comparing lenders. Lenders like indiagold maintain the highest level of transparency, and you must choose a lender which does the same.

6. Safety and Security of Pledged Gold

• Storage and insurance practices: The collateralised gold is stored in highly secure vaults by the lenders. Lenders like indiagold go a step ahead by securing the collateral in bank-grade lockers, and also insuring the collateralised gold to mitigate any sort of risk related to the loss of collateral.

• Security standards followed by banks: The banks follow stringent security measures, as prescribed by the Reserve Bank of India (RBI) concerning the specification of vaults and it’s security.

7. Tips to Choose Between NBFC and Bank Gold Loans

• Comparing the total cost of borrowing: The total cost of borrowing, as the name suggests, includes the interest component payable throughout the loan term, other forms of fees such as application fees, foreclosure fees, repayment fees, etc. The total cost of borrowing is a relevant indicator which can help choose the right lender from a cost perspective.

• Checking the flexibility of repayment: Repayment flexibility is a major deciding factor while choosing a lender. The lender providing higher flexibility is often the one to go ahead with. Since flexible repayment can help the borrower repay the loan more easily without having to strain their wallet.

• Evaluating service quality and turnaround time: Service quality is a great indicator of whether the service provider is worth choosing or not. So is the case while deciding on the lender.

• Reading terms and conditions carefully: This is a crucial step when entering into any sort of contract.

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