Gold is considered as a precious metal which is popularly used for various purposes such as industrial, commercial or for investment purposes. In such a loan, the customer pledges their gold jewelry as a collateral with the lender. The lender, in turn, sanctions the loan amount based on its market value. Unlike other secured loans, there are no restrictions on the end usage of the funds availed. It is a very quick and easy way of fulfilling one’s financial needs. Be it a wedding, family vacation or your child's higher education. Financial institutions and NBFCs offer these loans at a lower rate of interest.
- What is a Gold Loan?
Gold loan (also called loan against gold) is a secured loan taken by the borrower from a lender by pledging their gold articles (within a range of 18-24 carats) as collateral. The loan amount provided is a certain percentage of the gold, typically upto 80%, based on the current market value and quality of gold.
Table of Content
- What is a Gold Loan? The Complete Understanding
- What are the benefits of going for a gold loan?
- How Do Gold Loans Work?
- What are the Features of a Gold Loan?
- Who Should Opt for a Gold Loan?
- How to Opt For a Loan Using Digital Gold?
- Tax Benefits Over Gold Loan
What are the benefits of going for a gold loan?
Gold loan is similar to personal loan in meeting your immediate financial requirements, be it an international education, marriage expenses, covering medical emergencies or any other personal use.
Quick Disbursal: Minimum documentation leads to faster processing of gold loan due to its secured nature.
Flexibility of Use: Since there is no monitoring of the end use, it gives you the flexibility to use the loan for any type of expense.
Secured Loan Type: You are not required to submit any other security/collateral to the lender other than the pledged gold ornaments.
Lower Interest Rate: Interest rates on gold loans are on the lower side when compared to personal loan, since gold serves as collateral.
Liquidate your idle asset: An idle asset, gold is seldom used for generating money. Hence gold loan is the perfect solution to raise capital and use the fund when you require money to meet your financial needs. It is also more secure in the confines of a bank’s or a financial institution’s locker than your home.
A gold loan is a secured loan wherein the borrower keeps their gold, ranging from 18K to 24K, with a bank or a financial institution as security and avails capital against it. On comparative terms, a gold loan can be understood as a similar concept to a “mortgage loan” in which the owner keeps their house or property as mortgage with the bank and takes a loan against it to fulfill their need for capital.
How Do Gold Loans Work?
A gold loan is among banks’ profitable loans as banks are free from the worry of non-performing asset (NPAs). This is because the jewelry which is taken as collateral remains with the bank even if the borrower defaults on the payment of their monthly instalments (EMIs) on their loan.
The way a gold loan works is
Checking the quality: When a customer approaches a financial institution for a gold loan, the first step the institution takes is to check the purity of the gold jewelry that is being considered as collateral along with determination of value of the jewelry.
Know Your Customer (KYC): Know your customer norms and checks as stated by the Reserve Bank of India (RBI) are performed by the bank, where the bank gets to know their customer’s details such as identity, credit history, the necessity for applying for a loan and other details crucial in granting the loan.
Approval of gold loan: Once the quality and value of jewelry is determined and the KYC procedure is complete, the loan terms are agreed upon by both the financial institution and the consumer. Upon agreement, the loan is approved and the amount is then credited to the borrower’s account. This entire process can be completed within a couple of hours.
What are the Features of a Gold Loan?
- Interest rates
The interest rates on gold loans vary based on the purity of gold. The higher the purity of gold, the higher the amount that can be availed. Interest rates vary from 8% per annum to 18% per annum in the public sector, whereas in the private sector these rates are as as high as 24% per annum.
- Loan available even to low credit scorers
As the jewelry will be deposited with the bank as collateral against the loan, the bank is confident of sanctioning a loan to the person even with a low credit score.
- The weight of stones and their value is not counted
Even though precious stones have high value, they are not considered at the time of calculation for a gold loan. Only the value of gold is taken into consideration for the calculation, thus many a times a digital gold product is preferred against a regular product for the purpose of pledging.
- Tenure
A gold loan is generally a short-to-medium term loan, where the tenure ranges from six months to 24 months. Thus, it is not a long-term loan instrument.
- You can avail Loan up to Rs.1 Crore or more & up to 70% of value for any purpose
- You get 100% Safety & Security of your Gold Jewellery
- Receive your Gold Loan prepared in less than 30 minutes
- Enjoy Anytime Liquidity.
- No EMI, Service just Interest, and enjoy the Loan facility
- Lower Interest Rates on Gold Loan
- Simple documentation and fast processing.
- The overdraft limit changes depending on the market price of gold.
- The interest rate is payable only the amount of the overdraft that you use.
Who Should Opt for a Gold Loan?
- Those with short-term fund requirement
Gold loan works as a common working capital loan in businesses fulfilling the short term requirement for funds. In such scenarios, a gold loan is preferred against a personal loan with adverse interest rates on a comparative basis.
- Those with low credit score
As the jewelry acts as a collateral against the loan, the bank is comfortable in advancing a gold loan even to a person with a low credit score.
- Those who have gold but are taking a personal loan
People who are considering a personal loan with a short-time duration and have gold lying idle in lockers should consider taking a gold loan instead of a personal loan in order to save up on the interest cost.
- Those opting for gold loan from the unorganized sector
Users consider opting a gold loan from unorganized players amid fears of rejection from organized financial institutions that may not provide them a loan because of their credit score history. Such users end up paying hefty interest rates ranging up to 25% to 50% per annum.
Opting for a gold loan from banks and other organized players is a better option since credit history is not a factor that impacts the loan given a gold loan is completely secured. This would help save the interest cost as banks are required to charge interest as per RBI norms, which are market-compliant and not exorbitant.
How to Opt For a Loan Using Digital Gold?
- With the introduction of digital gold products, people now have access to a more lucrative option in order to reduce the overall interest burden on gold loans.
- You could consider liquidating your physical pure gold (available as “vedhnis”, biscuits, coins and bars) and converting the cash into the digital sovereign gold bonds (SGBs) form. This would help you in two ways: one in securing the funds required and second in earing an interest income of 2.5% annually on the face value even during the loan term, thus reducing the overall cost of credit. For instance, SBI’s interest rate for loan against SGBs is 9.25% but as the underlying is an SGB, the effective cost would be 6.75% per annum.
Tax Benefits
- Tax benefits that are associated with the utilization of the gold loan for specific reasons include:
- Purchasing of a house or improvements thereto: Tax benefits can be availed under Sections 24 (b) and 80C of the Income Tax Act, which allows the exemption of the qualifying portion of interest expense and the principal repayment respectively, effectively reducing the overall cost of credit.
- Business interest cost: Interest expense on gold loan taken for business purposes can be claimed while filing tax returns as a business expense, effectively saving upon your tax liability.