Gold loans could be an easily available alternative to personal loans, but the customers should know about the risk factors before availing this.
Investment in gold is seen as a hedge against financial uncertainties and inflation. Loans also can be taken against gold jewellery and ornaments to meet financial emergencies. If you are in urgent need of cash to deal with some financial crisis, you can avail a gold loan by pledging your gold jewellery and ornaments. With almost all banks and many non-banking financial companies (NBFCs) offering online gold loans these days it has become convenient to avail them. However, it’s important to know the nuances and the underlying risks before availing a gold loan.
According to market analysts, over the decade the compounded consumer price index of gold has remained at 6.3% and the annualised return on gold stood at 11%. A gold loan is a convenient option if you’re looking for hassle-free financial assistance to deal with a financial crisis.
Gold loans could be an easily available alternative to personal loans, but the customers should know about the risk factors before availing this, according to experts.
Benefits
Gold loan disbursals have seen a growth of 102% between 2019 and 2022, according to data from the Finance Industry Development Council (FIDC). This demonstrates the rising confidence that customers have in gold loans as a dependable means of meeting financial requirements.
The time needed to process the documents submitted by the borrower along with the loan application has been drastically reduced due to an increasingly digitised process. This enables lenders to quickly and easily release the loan amount to the borrower, and that too even within a few hours in some cases.
Gold loans come with lower interest rates compared to other financial products, such as personal loans, which have much higher rates. Personal loans often have interest rates between 10.50% and 36% per annum. The annual interest rate for gold loans starts at as low as 7%.
The interest rates for gold loans are determined by the quantity of gold pledged as collateral and the price of gold, the borrower’s credit history is not taken into account as it’s a secured loan. Those with bad or low credit scores may opt for gold loans.
Limitations
The weight and purity of the gold, pledged as collateral for the loans, are very important parameters. The loan amount to be disbursed by the lenders is only decided after the gold jewellery is examined properly.
The Reserve Bank of India (RBI) has set a maximum Loan-to-Value Ratio (LTV) of 75% for gold loans, which means that the maximum loan disbursal amount is limited to 75% of the value of the gold pledged as collateral.
There are the risks of losing your gold jewellery if you default on loan repayment. As the gold works as a security for the creditor many lenders melt the gold and liquidate it to recover the unpaid amount. So, it’s important to check the credibility of the lender before availing the loan and go through the terms and conditions in detail. Experts advise to opt for the gold loans offered by banks compared to other creditors.
Also before finalising the gold loan offer, compare the best loan to value ratio you can avail. It’s also important to check in details the repayment structure, which could be monthly EMIs, partial repayment or only interest EMIs.
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