Table of Contents
- Working of Gold Loans
- Checking the quality
- KYC
- Approval of a gold loan
- Gold Loan Features
- Rates of interest
- Loan-to-value ratio (LTV)
- Stones
- Credit Score
- Points to keep in mind before getting a Gold Loan
- Obtaining a loan from a bank or a non-bank financial institution (NBFC)
- Gold Valuation
- Gold Loan Tenures
- Loan Repayment
A gold loan is a secured loan in which the borrower deposits gold in the range of INR 18K to 24K with a bank or financial institution as security and receives funds in exchange. A gold loan is comparable to a "mortgage loan", in which the owner maintains a mortgage on their home or property with the bank and obtains a loan against it to cover financial needs. The loan amount is entirely dependent on how pure the gold is and is proportional to each other. The minimum gold purity needed by most lenders is 18 carat. If the borrower wants to take out a loan against their jewelry, the lender will not consider the worth of the jewels and stones. Moreover, gold bars are considered for securing loans against many lenders. Lenders also accept coins with a purity of 99.99 percent and a weight of up to 50 grams.
Working of Gold Loans
Since a gold loan is not related to non-performing assets, it is considered the most profitable. The jewelry, which is the loan's collateral, remains with the bank if the borrower is unable to pay the loan.
Let see how a gold loan works:
1. Checking the quality:
When a customer contacts a financial institution for a gold loan, the institution first evaluates the purity of the gold jewelry that will be used as collateral, as well as the jewelrys worth.
2. KYC:
It is an acronym that stands for "know your customer." The bank follows the Reserve Bank of India's (RBI) Know Your Customer regulations and checks. It learns about the customer's identity, credit history, the need for a loan, and other important facts for issuing the loan.
3. Approval of a gold loan:
The loan conditions are agreed upon by both the financial institution and the consumer after quality check and completion of the KYC procedure. After a definitive agreement, the lender authorises the loan and credits the funds to the borrower's account. This procedure most likely takes a few hours.
Gold Loan Features
1. Rates of interest:
Gold loan interest rates vary depending on the metal quality. The greater the amount of gold, the higher the purity. In the public sector, interest rates range from 8-18% per year, whereas rates can reach 24% per year in the private sector.
2. Loan-to-value ratio (LTV):
According to RBI norms, banks can lend up to 90% of the value of gold, with a minimum haircut of 10%. The real loan to value ratio often ranges from 55-65%, suggesting a 35-45% buffer for banks, making it the safest credit for them.
The loan-to-value ratio, or LTV ratio, is the amount of money a consumer will get compared to the worth of gold. For example, if we consider gold ornaments worth INR 20,000 and the current loan-to-value ratio is 65%, the maximum loan amount a borrower can get will be INR 13,000.
Here are the 7 trends in gold loan you may have missed:
1. Stones:
Lenders do not consider precious stones despite their high value when calculating a gold loan. Because only gold value is used in the computation, a digital gold product is favored over a normal product to pledge.
2. Credit Score:
The bank feels confident in authorizing a loan to the individual even with a poor credit score, since the jewelry will be deposited with the bank as collateral against the loan.
Points to keep in mind before getting a Gold Loan
1. Obtaining a loan from a bank or a non-bank financial institution (NBFC):
While small-time jewelers and lenders do offer gold loans, a borrower should always select a bank or a non-banking financial corporation (NBFC) as safer options. A gold loan is a secured loan, thus, you must put your items up as collateral with the lender.
2. Gold Valuation:
The gold's worth determines the loan amount. Thus, the purer the gold, the greater the valuation and loan amount. In reality, the gold must be 18 or 24 carats to qualify for a loan. Also, if the borrower wishes to take out a loan against gold jewelry that has stones placed in it, the value of the stones will be eliminated. The gold price of when the loan is being taken is only considered.
3. Gold Loan Tenures:
A borrower should choose a term that they are comfortable with in terms of cash flow and other costs. Typically, the longer the term, the cheaper the EMIs (equivalent monthly installments). However, a borrower should always remember that a longer term entails paying a higher interest rate.
4. Loan Repayment:
Borrowers have a variety of options for repaying gold loans, including regular EMIs, bullet payments, and partial payments. The repayment schedule for a bullet loan is monthly, but a borrower can pay off the entire debt any time. If a borrower expects their finances to improve when they need to repay, this may be a viable choice.
In recent years, several NBFCs and banks have started offering doorstep gold loans, in which gold is examined and assessed at the borrower's home and released within a few hours. Gold loans, in general, are a prudent way to get money when a borrower needs the cash fast.
Consumers should be familiar with such items to address future needs, along with the newer versions that are safer and more effective at lowering the total loan interest load.
