Why do people take gold loans?

I. Introduction

• Brief overview of gold loans

Gold loans are a collateral backed form of lending, where the borrower gives the possession of their gold to the lender as a security to secure a loan. The borrower is supposed to pay back the applicable charges including the interest and principal payment. The gold collateral serves as a risk hedge for the lender as in case of a default, the lender can liquidate the collateral to recover the outstanding.

• Importance and relevance in current financial landscapes

Gold loan is one of the most crucial and famous forms of lending in the country. It is highly relevant in the current landscape as it has become crucial in increasing lending in the country. Reason being the fact that gold loans are fairly easy to avail, i.e. the barriers are pretty low - all that the borrowers need is their gold that they wish to collateralize. Otherwise, other requirements such as good credit profile/history, high credit score, income proof, other assessment, etc.

• Purpose of the article

The purpose of the gold loan is to help the readers understand the reason behind why take a gold loan, who opts for a gold loan, as well as risks and considerations associated with gold loans in the lending landscape.

II. What is a Gold Loan?

• Definition and explanation

Gold loans are great lending products that are backed by collateral. Although the commercials of the gold loan is not dissimilar to that of other forms of lending like personal loans, etc, where the borrower repays the gold loan to the lender in form of interest as well as principal payment. The gold collateral serves as a hedge for the lender’s lending risk to ensure that they’re able to recover the dues by liquidating the asset in an event of default.

• How it works (pledging gold as collateral)

Gold loan works like any other loans, the borrower is supposed to repay the lent amount along with applicable charges and interest. Also, since the barriers to avail a gold loan are almost non-existential, the risk exposure of the lenders is substantially high. To overcome this risk exposure - the lenders ask for collateral i.e. gold to hedge their lending risk. By taking custody of the gold, the lenders get into a position where they can liquidate the collateral to recover the overdue amount in the event of a default by the borrower.

• Key features (loan amount, interest rate, repayment)

Gold loan is a pretty straightforward lending product. However there are many lenders like indiagold that offer great customer centric features. Some key features of a gold loans by indiagold are as follows:

1. Low interest rate : One of the key features offered in indiagold’s flagship gold loan offering is that the lender offers one of the lowest interest rates available in the market. With interest rates starting at just 0.85%* per month - It is a steal!
2. High Loan to Value : Loan to value ratio determines the amount of loan that one can secure in relation to the value of their gold collateral. With indiagold, the borrowers would be able to secure one of the highest loan to value (LTV) ratio in the market!
3. Safe custody of gold : Safety of the collateral is paramount! Gold loan from indiagold offers safe custody of gold collateral in safe lockers and insurance on the collateralized gold means that you can rest easy!
4. Low documentation requirement : One of the biggest challenges with securing any loan is the complex documentation requirement. Gold loans are very borrower friendly in this regard! Taking a loan from indiagold requires minimal documentation requirement to process the gold loan application.
5. Quick processing : Quick processing of loan can help the borrowers fulfill the requirement for which they are availing a loan. Hence, it is crucial for the borrowers to choose a lender who offers quick processing. But by the design of it, the gold loan proposition is processed quickly as comp[ared to traditional loans such as personal loans.
6. Quick loan disbursal : indiagold offers quick loan disbursal. Once assessment is done, the indiagold disburses the loan in under 30 minutes*!

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III. Common Reasons Why People Take Gold Loans

A. Emergency Financial Needs

• Medical emergencies : Medical emergencies are one of the biggest reasons why people often opt for a loan. Since gold loan as a product can be processed quickly as compared to other loan products the borrowers often prefer gold loan to fulfill their time sensitive cash commitments such as in case of medical emergencies. Gold loan for emergencies are a great way to deal with situations without worrying about the capital.

• Sudden personal or family crises : Sudden crises can hit anyone anytime! It is prudent to be ready with cash at any given time to ensure that you’re able to sail through the crises at least on the monetary front. This is one of the biggest reasons why people often opt for a gold loan so that they’re able to fulfill their requirement during urgent personal or family situations.

B. Business Purposes

• Working capital requirements : For businesses, one of the biggest requirements for capital arises from a lack of availability of working capital, and this inadequacy often hurts the productivity and potential profitability of the business. A gold loan for business can help overcome this issue or lack of capital availability and can essentially help the entrepreneur run their business to the fullest extent.

• Short-term investment in inventory or operations : Quite often in businesses, short term investment in inventory or operations can require a substantial capital injection as it has a direct impact on the productivity of the business. A gold loan can help overcome the lack by providing quick capital injection in the form of a gold loan.

C. Education and Marriage Expenses

• Funding higher education : Education can be an expensive affair! Especially in case of a higher education where the students often aspire to opt for the best institutions both locally and internationally. This may require a substantial investment on a short notice. This is where a gold loan for education can come really handy! It can help provide quick capital which can be instrumental in time sensitive and capital intensive matters such as admission application or time sensitive fee payment.

• Financing weddings or major family events : Family events, especially weddings are an extremely expensive affair, especially in India where people tend to push their boundaries. This involved expense too! In such cases, gold loans can help fund these expenses by providing a high loan in relation to the gold’s value.

D. Debt Consolidation

• Paying off high-interest loans : If you’re someone who has access to gold and also with various high interest loans such as credit cards outstanding, etc, then availing a gold loan can be extremely beneficial. In this way, you can set off your outstanding loan by taking a new loan (gold loan) with a low interest rate and repay the high interest rate loan, essentially helping you save money which otherwise would’ve been spent on interest payment.

• Replacing unsecured loans with secured gold loans : Secured forms of lending have various advantages over unsecured loans such as low interest rates, easy application process, borrower friendly terms and conditions, and much more! For some, it makes sense to replace the existing unsecured loans with secured loans such as gold loans. This can be done fairly simply, by applying for a fresh gold loan and repaying the existing unsecured loans and enjoying the benefits on offer by the gold loans! By this way, the borrower does not end up increasing the overall loan amount, while essentially making it efficient.

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E. Agricultural and Rural Needs

• Seasonal farm expenses : Agriculture as a business, is highly dependent on the seasonal variance as some crops only grow in some seasons. Hence, there can be an increase in the expense during such seasons. To cover these seasonal expenses, one can opt to apply for a gold loan as it provides a quick capital injection with minimal effort, low cost lending, and borrower centric terms and conditions, especially from lenders like indiagold.

• Equipment purchase or repair : Farming requires a lot of machine work, these machines often require a high amount of money to carry out repair or maintenance. In an event where the farmer may not have access to the capital to carry out these repairs and maintenance, a gold loan can prove to be a prudent way to arrange these funds so that the farming productivity does not take a hit due to non availability of capital.

IV. Advantages of Taking a Gold Loan

• Quick disbursal and minimal paperwork : One of the key advantages of a gold loan over conventional types of loans like personal loans is that the loan process requires a lot less paperwork. This can be attributed to the fact that a gold loan is a collateral based loan, and the lender’s risk is covered by the gold collateral, hence the requirement to do extensive paperwork may not be needed.

• No need for credit history : Credit history is a relevant marker for a person’s borrowing habits. A good credit history reflects the borrower’s ability to pay off their loan liabilities efficiently and on time. Since gold loans are backed by a gold collateral, these risk markers are of not great relevance as the loan is secured by the gold. Hence, there is no need for a credit history. A borrower with a not-ideal or a fresh credit history can also easily avail a gold loan.

• Lower interest rates compared to personal loans : Gold loans are collateral backed lending products. From the perspective of lending principals, higher risk translates to higher returns and vice versa. Since the risk for the lenders with gold loans is hedged with the help of gold collateral, the lenders are able to pass on the benefit to the borrowers in the form of low interest rate. Lenders like indiagold offers affordable gold loans with interest rates starting at just 0.85%* per month.

• Continued ownership of gold : Even if the gold is collateralized, and the custody rests with the lender till the loan is settled, however the ownership of the gold does not change. This means that even though you don’t have the possession to your gold, it is still your asset.

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V. Who Typically Opts for Gold Loans?

• Rural vs urban borrowers : Gold loans have a high penetration in the Indian lending landscape. The borrowers come from both rural as well as the urban parts of the country. This has become possible due to the fact that lenders (Both organized and unorganized) are present in almost all the entirety of the country, making it easier for the borrowers to avail a gold loan.

• Small business owners : Quite often the small business owners face a cash crunch to keep their business afloat or even to expand their operations / footprint in the market. To fund these expenses, gold loans are a viable option as it provides a quick, efficient, and low cost financing to fulfill their capital needs.

• Middle-income households : Middle income households make up for a substantial part of the borrower base for gold loans in India. Since the gold loans are geared towards borrower centricity with features like low cost, quick disbursal, low entry barriers, and other features of customer centricity, the gold loan product has been very successful in penetrating the middle income household.

• Individuals without access to traditional credit : Traditional credit like personal loans, etc. requires an extensive credit check, and assessment. However, that is not the case with gold loans. There is no requirement for a good credit score or an extensive and good credit profile. The lenders don’t even require any proof of income. Hence, for individuals without the access to traditional credit, gold loans presents a viable option.

VI. Risks and Considerations

• Risk of losing pledged gold : One of the biggest risks with availing a gold loan is that in case of a default by the borrower, they may lose the pledged gold. Because, in case of a default the lender reserves the right to liquidate the asset to recover any outstanding dues.

• High penalties for default : Default on loans attracts high penalties. In case of a default, the borrower may have to bear high penalty charges, and even loss of gold collateral as stipulated in the gold loan agreement. Hence, it is essential to repay your loan liabilities on time and avoid any defaults on loan.

• Interest accrual on delayed payments : Delayed interest payments can lead to accrued interest on the outstanding principal as well as the delay interest component of the loan. This increases the cost of borrowing substantially and can lead to undesirably high payment towards the loan repayments by the borrower.

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