Top Benefits of Opting for a Gold Loan Over Other Loans
Introduction
- Brief explanation of what a gold loan is
Gold loan is one of the most famous types of lending in India. These types of loans have been in existence since many decades, even before the introduction of the formal lending market. The key participants in the gold loan industry are the borrowers, lenders like banks, NBFCs, money lenders, etc. and the regulator.
The basic principle of gold loan is similar to other types of loans, with only difference being that the borrower secures the loan basis their gold collateral. I.e. The lenders offer loan amounts proportional to the value to the gold collateral. The borrower then repays the lender in either equated monthly installments, or in the form of bullet payments along with the full applicable interest component, and upon settlement of loan, takes back the possession of the gold collateral.
- The growing popularity of gold loans in emerging and developed markets
Gold loans have been around for many decades, and these loans never lost relevance due to the fact that these are easily available, and have an uncomplicated application and repayment process. However, over the recent couple of years, these loans have started gaining traction due to multiple reasons such as easy application process, no credit score requirement, quick processing, and reliable lenders like Indiagold who promise to keep the gold collateral safe!
- Purpose of the article: comparing gold loans with other types of credit (personal loans, business loans, etc.)
In this article we shall do a loan comparison, and discuss why it makes sense to opt for a gold loan as opposed to some other popular loan products available in the market.
What is a Gold Loan?
- Definition and how it works
Gold loans are a collateral backed type of funding, where the collateral is the borrower’s gold ornaments. The principle of these loans is simple. The borrower borrows the money and gives the possession of their gold to the lender. Upon the final settlement of the loan, the lender gives back the possession of gold to the borrower.
- Who offers gold loans (banks, NBFCs, fintech platforms)
Gold has a robust demand, and so does the lending products based on gold. These loans are offered in both unorganized as well as organized lending sectors. However, it is recommended to avail loans from participants of the organized lending sector as there are regulations and oversight to protect the borrowers from deceit. In the organized sector, gold loans are offered by banks, fintech platforms, and NBFCs. A major player in the NBFC sector being Indiagold offering customer centric gold loan solutions, enabling the customers to enjoy quick and easy gold loans at an affordable rate, while promising the safety of their gold collateral.
- Use cases (personal emergencies, business needs, education, etc.)
Unlike other lending products where the loan amount can only be utilized for a specific purpose, gold loans have no such challenges. For example, one can only use a business loan to inject debt capital in their business, similarly a vehicle loan can only be utilized to purchase a vehicle, etc. With gold loans, the borrower can utilize the funds as they see fit!
Key Benefits of Gold Loans Compared to Other Loan Types
1. Faster Loan Processing Time and Disbursement
- Minimal paperwork
One of the biggest gold loan benefits is the fact that these loans are extremely easy to avail! These loans require minimal paperwork. As compared to other forms of lending like personal loans, where extensive documents are required for assessment, gold loans require minimal paperworks, which adds on to the customer centric loan journey.
- Same-day or instant loan availability
The loans also offer extremely quick processing. Reason being that these loans are backed by gold collateral, hence the assessment process doesn’t take a long time. In most cases, the loan eligibility is assessed in a matter of minutes, making the gold loan available at a lightning quick speed!
- No need for income proof or credit score in most cases
In contrast to unsecured loans, these loans are backed by collateral, i.e. the lender reserves the right to liquidate the collateral to recover any outstanding dues. This allows the lenders to mitigate their risk, hence during the assessment process, the lenders don’t require an income proof or a solid credit score.
2. Lower Interest Rates
- Secured nature of the loan means lower risk for lenders
Risk and returns are directly proportional. Since gold loans are backed by gold collateral, the lenders reserves the right to liquidate the gold to recover any outstanding dues in an event of default or non-payment. This helps the lenders to mitigate their risk exposure, and allows them to pass on the benefit to the borrowers in the form of lower interest rates. An interest rates comparison between different loan types will indicate that gold loans are one of the most affordable forms of financing!
- Comparison with personal loan or credit card interest rates
The gold loans presently available in the market are extremely cost-effective. These offer funding at a low interest rate, essentially making it an obvious choice for the borrowers looking to avail a quick debt funding. While other lending options are available like personal loans, and credit cards, the interest component is comparatively higher. Personal loans are offered with interest rates in the range of 11% to 20% per annum along with strict credit score requirements, whereas credit cards offer interest rates in the ballpark range of 3% to 4% per month, making it an expensive way to avail credit.
Gold loans are available at a much less interest rate. Indiagold offer gold loans starting at just 0.75%* per month!
3. No Credit History Required
- Accessible to individuals with poor or no credit history
The loan eligibility criteria is one of the best features of gold loans. Since these loans are backed by the borrower’s gold collateral, there is no credit score requirement. This means that individuals with poor or no credit history can also avail a loan without any hiccups!
- Ideal for rural borrowers, self-employed individuals
These loans are ideal for rural borrowers, and self-employed individuals like freelancers who may not have sufficient proof of income, as other types of loans like personal loans require income proof to support the application process, which is not the case with gold loans.
4. Flexible Repayment Options
- Bullet repayment, and EMI facility
Unlike other loan products, gold loans offer unmatched customer centricity by offering flexible repayment options. The borrowers can repay the liability either in the form of bullet payment, where the borrower is supposed to pay interest on a monthly basis, and as when they have sufficient capital, they can make additional payment towards principal amount, essentially bringing down the total outstanding principal. Borrowers can also opt for an EMI facility where a fixed EMI for a fixed tenure will be decided, and the customer will pay equated monthly installments consisting of both principal, as well as interest components, and at the end of the loan tenure the entire loan is repaid.
5. Retention of Gold Ownership
- Gold remains in borrower’s name
Although the collateral is possessed by the lender, the ownership of the gold remains with the borrower. This means that the gold would belong to the borrower, and it’s only possessed by the lender to cover their lending risk. However, it is important to note that in case of default or non-repayment, the lender reserves the right to liquidate the gold to recover outstanding dues.
- Returned upon complete repayment with interest
Once the loan is repaid in full including principal, interest, and any applicable charges, the lender will give back the possession of gold to the borrower.
6. High Loan-to-Value (LTV) Ratio
- Borrowers can get up to 75% of the gold's value
As per the regulations set forth by the Reserve Bank of India (RBI) lenders can give gold loans up to 75% LTV (Loan-to-value ratio). This is to ensure that the lenders are safe from the price volatility, as well as the borrowers are able to get maximum value as loan. Although, the LTV is up to the lender’s lending policies, it cannot exceed 75%. Indiagold offers gold loans with LTV up to 75%
- Higher than typical secured loans like property loans
There are many forms of secured or collateral based loans available in the market, like loans against property. However, a major challenge with those loans is that the collateral is usually high value, and has to be pledged in full. Whereas, with golf loans, one can pledge the amount of gold proportional to the need.
Also, the loan to value ratio (LTV) for gold loans is typically higher when compared to loan against property, which enables the borrower to avail maximum loan for their collateral.
7. Security and Transparency
- Gold stored securely by trusted institutions
Gold loan lenders ensure that the borrower’s gold is kept securely. Lenders like Indiagold have highly secure lockers where the gold is kept safely, so the borrowers can be rest assured for the safety of their collateral.
- Valuation done in front of the customer
Availing a gold loan is a highly transparent process. The lenders typically weigh the gold ornament in front of the borrower, and check for the purity level. Based on the aforementioned two factors, the loan value is determined, and subsequently further steps towards loan application are taken. If the borrower is not comfortable with the loan amount offered by the lender, then they can opt out.
Comparisons with Other Loan Types
- Gold Loan vs. Personal Loan
- Secured vs. unsecured
Gold loans are a secured form of lending whereas personal loans are unsecured loans. Although on paper one may find that since personal loans are unsecured, these may be better for the borrowers. But that is not the case in all scenarios. Due to the nature of loans, gold loans offer lenders easy assessment, quick processing and a higher loan to value.
- Speed, and interest rate
In terms of speed of assessment, loan approval process, processing, and quick loan disbursal, gold loans are clearly ahead of personal loans. As these loans are backed by collaterals, the lenders don’t need to do an extensive assessment to understand and cover their lending risk, which allows gold loans to be a more efficient form of lending.
Interest rates offered for gold loans are typically borrower friendly. Personal loans carry an estimated interest rate between 11% to 18% per annum, whereas for gold loans, the interest rates are on a lower side. Indiagold offers gold loans starting at just 0.75%* per month.
- Gold Loan vs. Business Loan
- Documentation, approval time, collateral requirements
When compared with business loans, gold loans offer a far easier documentation process. Unlike business loans, the borrower doesn’t need to get endless documents in place to avail debt funding. Borrower’s gold collateral is enough to secure them a loan!
Risks and Considerations
- Risk of losing gold if repayment is missed
The biggest risk that the borrowers should be aware of, is that the since the gold loans are collater;a based, i.e. backed by the gold collateral, the lenders reserves the right to liquidate the collateral in an event of default or non-repayment, which means that the borrower will essentially lose the gold collateral if they fail to repay the loan.
- Market value fluctuation considerations
The market value fluctuation is a type of risk which does not have a direct impact on the borrower. Rather an indirect one. In an event of an exponential rise in the gold price the market value of the gold collateral increases however the loan taken against that collateral stays stable. Many lenders do offer a top-up on the loan amount in an event of increase in the market value.
