What Are Procedure Merits And Demerits Gold Loan

What Are Procedure, Merits And Demerits Gold Loan

Gold loans are extremely famous and one of the most sought after types of secured loans available in the lending market. In this article we shall explore the gold loan process, merits, demerits, and if you should consider availing one for your financial needs.

Before explaining gold loan benefits and drawbacks, it is important to first understand what is gold loan, and the process of availing one.

1. Introduction to Gold Loans

• Meaning and basic concept of a gold loan: Gold loans are a type of collateral backed loans, where the borrower’s gold serves as a security to secure a loan from the lender. Once the loan is repaid in full, including the principal, interest and associated charges, the loan is settled and the possession of gold is given back to the borrower.

• Why gold loans are popular in countries like India: In countries like India, a good chunk of the population is involved in unorganized sectors, hence having a clean set of income documents might not be possible. For such a population set, a loan which has minimum barriers to entry is most suitable. Also, the fact that Indian households possess a good amount of gold, makes gold loans a more accessible and a feasible option for the general population of India.

• How gold loans differ from personal loans: Gold loans are a completely different lending product when compared with personal loans. Gold loans are a secured type of loans which are backed by the borrower’s gold collateral, whereas personal loans are unsecured. The working of the commercials however can seem similar to many.

2. What Is a Gold Loan?

• Definition of a gold loan: Gold loans are collateral backed loans, secured by the borrower’s gold in order to avail loan facilities from the lender.

• How gold is used as collateral: In lending activities, the biggest risk is default, i.e. the lender being unable to recover the outstanding. In such cases, having a collateral that can be liquidated to recover dues in an event of a default by the borrower helps. Gold being a very popular asset class, with a high liquidity, low price volatility serves as a perfect collateral.

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3. Procedure to Obtain a Gold Loan

Step 1: Eligibility Check

• Age criteria: Many lenders have a minimum age criteria in place. The first and foremost step to obtain a gold loan is to ensure whether the borrower clears the minimum age barrier.

• Ownership of gold ornaments: The most important step in determining eligibility is to ensure whether the borrower really is the owner of the gold which is being collateralised.

• Basic documentation (ID proof, address proof): Basic documents for KYC like Aadhar card, address proof, photograph, and PAN card are mandatory as a part of the documentation.

Step 2: Gold Evaluation

• Purity testing (karat check): The next step is to evaluate the gold collateral, which starts with the purity testing. The lender checks the purity of the gold collateral by using reliable purity testers.

• Weight measurement: Once purity is checked the lender then checks the weight of the collateral. It is important to note that in case of gold ornaments, only the net weight of the gold, excluding any weight of stones, diamonds, etc. is considered.

• Market value assessment: Basis the purity and the weight of the collateral, the market value of the gold collateral is determined. Knowing the market value is essential to calculate the maximum amount of loan that can be provided to the borrower

Step 3: Loan Amount Sanction

• Loan-to-Value (LTV) ratio: Loan amount is sanctioned based on the market value of the gold collateral and the LTV ratio offered by the lender. LTV ratio determines the maximum amount of loan that can be offered in relation to the market value of the gold collateral. Lenders like indiagold offer one of the highest LTV ratios in the lending space in India.

Step 4: Documentation and Agreement

• Signing loan agreement: Once the terms and conditions are agreed upon, the agreement is then signed by the borrower and the lender.

• Understanding interest rate and repayment terms: Understanding the interest rates, charge structure, and repayment terms is essential. Ensure that you do sufficient research and choose the lender who fare well on the terms and conditions.

Step 5: Disbursement

• Instant cash / bank transfer: Upon signing of the agreement, the gold collateral is taken into the custody by the lender and disbursement is initiated. Lenders like indiagold offer a quick disbursement in as low as 30 minutes!

• Loan tenure options: Loan tenure is decided and the term starts upon disbursement of the loan amount.

Step 6: Repayment and Gold Release

• EMI payment / bullet repayment: Repayment is supposed to be made in-line with the agreed repayment terms and structure. Once the entire repayment is made in EMI/bullet repayment method, the gold loan is settled.

• Retrieval of pledged gold after full repayment: Upon settlement of the gold loan, the pledged gold is retrieved from the lender’s secure storage. After retrieval of the collateral, it is released i.e. handed back to the borrower.

4. Merits (Advantages) of Gold Loan

1. Quick Processing and Disbursal: One of the biggest merits or advantages of gold loan is the pace at which the entire process of processing and disbursal. indiagold offers disbursal in as low as 30 minutes.

2. Minimal Documentation: Gold loans require minimum documentation, and often comes with little to no barrier to entry. You are eligible to get a gold loan as long as you have gold to collateralize.

3. Lower Interest Rates Compared to Unsecured Loans: Lenders are able to offer lower interest rates on lending products in which they have a low risk exposure. Since these loans are secured by the borrower’s gold collateral, the interest rates offered with such loans is usually lower when compared to conventional unsecured loans such as personal loans.

4. No Impact of Low Credit Score: The borrower’s credit score or credit profile has no impact on the eligibility to avail a gold loan. Only the gold’s market value impacts the maximum amount of gold loans.

5. Flexible Repayment Options: Many lenders offer flexible repayment options in gold loans which is highly convenient for the borrowers and essentially decreases the default rate.

6. Safe Custody of Gold: The collateralised gold is safely kept by the lender in secured locker facilities to ensure safekeeping.

7. Suitable for Short-Term Financial Needs: Gold loans are extremely suitable for individuals with short term capital needs.

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5. What are the Disadvantages of Gold Loan

1. Risk of Losing Gold on Default: One of the biggest risks of gold loans is the risk of losing gold. But this only happens in an event of default by the borrowers. Also, sufficient payment reminders are sent before suction to ensure that borrower is given a chance to save their gold.

2. Interest Burden if Not Repaid on Time: This is a common con with any kind of loan. Non-repayment can quickly increase the burden. Hence, it is recommended to borrow responsibly and make consistent repayments.

3. Fluctuation in Gold Prices Affects Loan Value: Fluctuation in the market value of gold can affect loan value too. In case the gold price increases, the borrower can avail more loan, however in case of a decrease in gold prices, the borrower may get a margin call. The key is to keep the loan amount in-line with the LTV ratio offered by the lender.

4. Additional Charges (processing fee, valuation fee, penalty): Like other lending products, gold loans too attract additional charges. This ends up inflating the cost of loan. It is essential to only choose lenders that offer low charges and no hidden charges like indiagold.

5. Emotional Value of Gold at Risk: No one ca put a price to the emotions. Collateralising ones gold which may hold significant value can be enotionally heavy for some.

6. Comparison: Gold Loan vs Personal Loan

• Interest rates: Gold loans attract a lower interest rates compared to traditional forms of lending like personal loans. Lenders like indiahol offers oneof the lowest interest rate in the industry!

• Processing time: Processing time for gold loans is extremely low when compared wuth personal loans. This can be attributed to quicker assessment of loans.

• Documentation: Documents required to avail a gold loan is lower compared to persoanl loans. This is one of the key benefits that makes gold loans a lucrative option for many.

7. Important Factors to Consider Before Taking a Gold Loan

• Checking lender credibility: One of the most important factors while availing a gold loan is to check the lender’s credibility in the industry. Choosing a credible lender can help the borrowers be at peace that their gold is with a responsible and trustworthy lender while they repay the loan

• Comparing interest rates: Comparing interest rates is essential. Since it has a direct inpact on the cost of borroing, choosing the lender offering low interest rate on gold loans is essential.

• Understanding hidden charges: Understanding the fine print and hidden charges is extremely imporant. Choosing indiagold may make most sense since there are no hidden charges and you may clear up your doubts or concerns regardibg the charges structure with the relationship manager.

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