5 Things to Know before Getting a Gold Loan

Gold loans are gaining in popularity all over the country. Both banks and Non-Banking Finance Institutions are eager to offer gold loans. Depending on one’s requirement, you can get several benefits such as lower interest rates and faster loan disbursal.

For years gold loans have been an important way to get finance in the country, when other means of getting funds were not available. Most households in the country have gold items at home.  These can easily be used as collateral when there is a drastic need for funds.

The popularity of gold loans increased during the last the last decade due to the spread of operations of Muthoot and Manappuram Finance companies. Now, these companies have branches across the country. After seeing their success, banks also started to popularize this product. They have begun to aggressively market gold loans.

It is important to remember that gold prices have been fluctuating by a considerable margin in recent years. Furthermore, the RBI has severely clamped down on gold loans by both the NBFCs and banks after imposing a number of restrictions in matters of gold loan interest rates and Loan to Value ratio. NBFC gold loans used to have a loan to value ratio of 85% to 90%, and now could only give till 60%.

After January 2014, banks and NBFCs could give a Loan to Value ratio of 75%. It was after this decision by the government that both banks and NBFCs seriously started to consider giving gold loan service to customers. However, with price fluctuations and with RBI regulations, they both needed to tread with care.

If you wish to get a gold loan, there are a few things that you need to keep in mind. Here are the things you need to know:

1. Purpose and tenure: Gold loans are generally for the short term, such as 3 to 6 months. The maximum gold loan term is 12 months. So if you do want to take such a loan, make sure you are confident of making repayment by this period. Otherwise, the bank can legally possess your gold. We do not advise you to take gold loans for speculation either.

2. Interest and charges: Interest on gold loans can be higher than other types of loans, especially if you take it from a NBFC. If you can make do with other loans, that is a good place to start. If other loans do not suit you, then you can come to take a gold loan. But remember, you still have to repay it back on time. And you also need to take care of the interest and other charges.

3. Loan amount: The maximum amount of loan you can get against your gold depends from one lender to another, especially with the NBFCs having a larger product variance. The lender retains a margin of your gold’s value as security or profit in case you cannot repay. So before taking a loan, understand how the lender works.

4. Understand the lender’s repayment terms: Various lenders have different terms for repayment. Some allow you to repay the principal at term’s end, while for others you have to give EMIs. Others yet require you to pay both interest and principal during the tenure. Know about these things before applying.

5. Which is better - NBFCs or banks: Gold loans used to be popular in the rural areas, where people have less liquid money but considerable gold jewelry items. Today, gold loans have become popular in cities as well. While NBFCs have been the preferred choice, banks are becoming popular providers of this kind of loan. Earlier, NBFCs could give a higher LTV, but after RBI’s restrictions, it can now give LTV on par with banks. This has considerably closed the gap between the two. However, there are still differences.
   Banks give lower interest rates. Additionally, the interest rate is even lower with public sector banks. Loan disbursal is faster with NBFC, as is documentation.
   NBFCs, or most of them anyway, allow you to repay the principal at loan tenure and, and the interest during loan tenure. At banks, you need to pay them both regularly. NBFCs do not charge penalty for prepayment, while many banks do charge that.

If you heed all these points, you will surely find the gold loan you are looking for. We at mymoneykarma wish you the best.