Why Gold Loans Are the Quickest Way to Access Funds
What is Gold Loan
A gold loan is a secured loan in which you pledge gold as collateral in return for cash. Gold loans are in huge demand due to the lower interest rate and fast disbursal. Gold loans also provide the borrowers with an easier financing and highly flexible repayment plans.
Key Features of Gold Loans
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Pledge of physical gold as collateral
Gold loans or jewellery loans are collateral backed loans, where the borrower’s gold serves as a collateral to secure loan amount. This collateral essentially decreases the risk exposure of the lender as in an event of default, the lender reserves the right to liquidate the collateral to recover any outstanding dues. However, on the flip side, presenting the collateral helps secure reasonable terms, and low interest rates on loans. This is the reason why gold loans are offered at an attractive rate of interest with high loan approval rates.
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Flexible repayment options
Gold loans offer highly flexible repayment options to the borrowers. Generally, a monthly interest payment is charged to the borrowers. However, the borrower can choose to make a bullet payment towards the loan to decrease the loan liability and payable net interest.
Types of Gold Loans
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Personal Gold Loan
Personal Gold loans are availed by the borrowers to fund personal expenses, which can be fit for various purposes like funding required in case of an emergency, to fund education, marriage, and even to avail money for any other personal purpose. These loans are taken with personal jewellery serving as a collateral for the loan.
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Business Gold Loan
Gold loans availed to fund business expenses qualify under Business Gold Loans. The capital availed from this loan can be used for a wide range of purposes like starting business, funding working capital requirements, funding expansionary projects and other expenses like funding inventory, funding expenses related to employee salaries, etc.
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Long term vs Short term gold loans
Gold loans offer a highly flexible term. The borrowers can enjoy gold loans for both long as well as short terms. The borrower has flexibility in terms of repayment, as most of the gold loans offered have a monthly interest component attached to it, however as per the borrower’s convenience they can make additional bullet payments towards their loan essentially decreasing the principal amount as well as net interest monthly interest payment.
Gold Loan Process
The process of securing a loan on gold jewellery or gold in any form is pretty straightforward and quick! A person with possession of physical gold in any shape and form can avail gold loan in a matter of minutes. Following are the steps involved in securing a gold loan
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Gold Evaluation
Upon placing the request to avail a gold loan, the borrower would be asked to produce the gold ornament or jewellery against which they wish to avail a gold loan. Upon producing the gold, the lender will then take the gold and do a physical evaluation of the same, which includes various checks and balances which not only measures the weight of the collateral, but also determines the purity level. If one wishes to avail loan against gold jewellery, then the assessment would help determine the net weight of gold in the jewellery (excluding any stone work). This helps determine the market value of the gold. Based on the evaluation, would the lender proceed with the next steps of releasing the gold loan.
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Loan Amount Calculation
Based on the result of the evaluation process, which gives a fair idea of the weight of the gold, purity level is the lender able to determine the current market value of the collateral. Every lender has an acceptable maximum amount that they can give as a loan against the security. This is called LTV (Loan to Value). As per the RBI (Reserve bank of india) guidelines, maximum loan to value offered can be up to 70%. I.e. The maximum amount that can be released as a loan against gold collateral cannot exceed 70% of the gold’s market value.
Based on the current market value, determined from the assessment, the lender then offers the gold loan to the borrower with disclosures about the LTV, processing fees, interest rates being offered. Lenders like India Gold offer one of the lowest interest rates on instant gold loans which makes the overall cost of borrowing attractive for the borrowers!
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Agreement and Documentation
Upon explaining all the relevant costs, terms and conditions, repayment schedule, etc. Once the borrower and lender are in concurrence, then a loan agreement is signed between the two parties. Essentially meaning that both borrower and lender enters into a legal contract highlighting all the details of the loan, and all relevant terms and conditions. It is advisable that the borrower reads these terms and conditions and be fully aware before entering into a legal contract. Failing to do so may attract unwanted surprises.
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Disbursement of Funds
Once the agreement has been signed and documents are processed, the lender then takes possession of the gold collateral and releases the funds to the borrower. The mode of payment release may vary depending upon the borrower’s preference, however citing the recent uptrend in all things digital, even the funds are directly released in the borrower bank account digitally.
Key Features that makes Gold Loans the fastest way to access capital
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Minimal Documentation
One of the key features of gold loans is the minimal documentation involved with securing the loan. All that the borrower needs to do is to find a lender, get the gold assessment done, and sign the agreement. The documents required would be the borrower’s Aadhar card, PAN card, and address proof along with the details and actual collateral i.e. gold.
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Instant Disburment
Gold loans offer instant disbursal of loan amount. Once the lender has made a successful assessment of the collateral, and based on the LTV (Loan to Value) agreed between the borrower and the lender and agreement executed, the lender takes possession of the collateral and releases the loan immediately. Based on the preference of payout, the borrower receives money either in the form of cash or a direct bank transfer. This is one of the best and key features as the whole process from assessment to disbursal of loan amount takes a very short span of time.
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Low Impact of Credit Score
Gold loans are backed by gold as collateral. Collateral backed loans carry a low risk from the lender’s perspective as it ensures that the lender would be able to recover the dues in an event of default by the borrower. Hence, even if a borrower looking for a gold loan has a low credit score, chances of approval are higher since they are backing up the loan with a gold collateral, which mitigates the lender’s risk, essentially making it easier for the borrower to secure debt funding.
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Loan Amount Flexibility
Another selling point of gold loans is the flexibility it offers with respect to the loan amount that can be taken. The loan amount that can be secured is directly proportional to the value of the collateral. If a borrower has a gold collateral with a high market value then they can take a high amount of loan. Although it is suggested that the borrower burrows responsibly, by considering their debt serviceability. Also, it is important to note that as per regulations put forth by the Reserve Bank of India (RBI) the lenders can offer a maximum loan to value (LTV) ratio of 75%. Borrowers can explore lenders willing to offer high LTV but within the RBI threshold. Lenders like India Gold offer attractive LTV while giving gold loans at a low interest rate!
Comparison between Personal Loan and Gold Loan:
| | GOLD LOAN | PERSONAL LOAN | | ----- | ----- | ----- | | Ease of Securing Loan | Gold Loans are comparatively easier to secure citing the fact that these are backed by gold as a collateral which means lower risk for the lenders and subsequently higher possibility of loan approval | Personal Loans are subjected to eligibility, and highly susceptible to rejections citing low credit score, unfavourable loan history, and other lending terms and conditions | | Documentation process | The documentation process related to Gold loans is pretty straightforward and involves less time and effort | Documentation process for personal loans can be a lengthy process, can involve high degree of documentation requirement | | Timeline of Processing | Gold loans can be availed in a matter of minutes, the only requirement being that the borrower has the gold collateral handy | Timelines associated with personal loans vary depending upon the size of the loan, and the credit profile of the borrower, but the timelines for processing are generally longer than Gold Loans | | Collateral Requirement | Gold loans as a product is designed in a way where the gold is kept as a collateral to secure debt funding | Personal loan may or may not require collateral from the borrower, as it depends on the risk level of the borrower’s credit profile | | Impact of Credit Score | Borrower’s credit score has a low impact on securing a gold loan as the loan is backed by gold as a collateral | Credit score has a high impact on personal loan, and it impacts the probability of approval or rejection by a great degree |
Situations where Quick Gold Loans can be Beneficial
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Emergency Expenses
Due to an unfortunate event, a person may be in a position needing immediate money to fund emergency expenses. In such cases, gold loans are a viable option as it offers a relatively easy loan process and quick processing, making it perfect for funding emergency expenses.
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Business Financing
Gold loans are a viable option to finance business needs, be it to fund expenses related to starting a business, fund working capital requirement, fund expansionary projects like introduction of new products, or expansion in new market, buy machinery, etc. or to even fund small and large expenses, gold loans are a viable way to secure funding since it offers quick processing, and easy approval.
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Short Term Financial needs
Gold loans are perfect for funding short term financial needs, as these loans offer instant loans, and a highly flexible repayment plan, where the borrower can make small bullet payments towards the loan or a big single payment to repay the entire loan.
Key Things to Consider:
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Gold Value Fluctuations
Gold as an asset has a highly volatile value, i.e. the price fluctuates highly frequently. This may impact the LTV, hence the loan value being offered to a borrower at a certain point and time does not guarantee the same loan amount offered in the future. It may increase or decrease depending upon the price fluctuation.
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Interest Rate
Interest rates depend upon the bank rate, and also the rates offered by various lenders. In case of gold loans, since the risk component for the lenders is low, usually interest rates offered are highly attractive! Lenders like India Gold offer highly attractive interest rates making it one of the best possible options to avail a gold loan.
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Repercussion of Default
Since gold loans are backed by gold as a product, the collateral means that the lenders have the right to liquidate the collateral in an event of a default from the borrower. Hence, it is important that the borrower ensures that they are making timely repayments as failing to do so may result in loss of collateral.
Conclusion
Gold loans are very popular because of the speedy processing, lower interest rates, and flexible repayment plans. As gold is used as a form of collateral, lenders can offer attractive terms as the risk associated with lending is relatively low. The process involves gold evaluation, loan amount calculation based on the value of the gold, and minimal documentation, making them accessible even with a low credit score. As soon as the agreement is signed, funds are released in a very short time either in cash or through bank transfer. These loans are perfect for emergency expenses, business financing, or other short-term needs. The borrowers must, however, be careful about the fluctuation in gold prices and the consequences of default since money lenders liquidate the collateral. And that is why gold loans are fast, flexible, and reliable in terms of short-term capital access with minimal documentation and quick disbursal.
