gold loans

What Are Gold Loans And How Do They Work?

A recent report has shed light on India’s largest private collection of gold in the world. Household across the country stores gold items of about $1.5 trillion as per the current market value of this yellow metal. This is because one has the chance to leverage the equity of the idle asset of this precious metal to their advantage to meet financial needs.

Owing to this and a few other factors, the demand for gold loans has recently soared, especially during and after the economic downturn in 2020.

What are Gold Loans?

Loans against gold are a secured credit option wherein individuals pledge their gold items to source funds against it. Like any other secure loan type, individuals get their collateral back once they complete the repayment. Additionally, borrowers enjoy a competitive interest rate like any other secured loan type.

However, the working of gold loans is a bit different than its other secured counterparts.

How Does Gold Loan Work?

Credit against gold works in the following ways: 

  • Loan application 

The workings of this credit begin with the application process like any other credit instrument. Here, individuals have the option to apply online, or they can visit any nearest branch of their preferred gold loan provider for the same.

  • Evaluation of gold items

This is where gold loans are different from other financial products. Once applied, the first and foremost thing that any financier will do is evaluation of gold items. Typically, reputed lenders will only accept gold items of 18 carats to 24 carats. Based on this evaluation, where purity and weight are checked, the financial institution will determine the loan amount an applicant is eligible for.

A point to remember here is that the maximum LTV of a gold loan in India is capped at 75%. It means if a borrower submits gold items of Rs. 1 lakh, he can get a loan of up to Rs.75,000.

  • Completing the documentation

The next step comprises document verification. Here, financiers complete the KYC process and review the income details of a borrower.

  • Loan approval

Following a successful evaluation of gold items, documentation, and signing of a loan agreement, the loan disbursal process starts. Borrowers will then receive the loan amount in their registered account.

Starting from application to disbursal, the entire gold loan process takes a couple of hours to complete. Besides knowing how this financial product works, one should also learn about its features in lengths to decide whether to apply for it or not.

Top 5 Features of Loan Against Gold

Here are the top 5 features of loan against gold –

  1. Lenient eligibility criteria

One of the top features of gold loans is their easy-to-meet eligibility criteria. Here, any individuals over the age of 21 in possession of gold items can apply for credit. Usually, lenders do not emphasize the credit profile of applicants. 

Thus, borrowers with a low credit score or bad repayment history can also apply for this financial product.

  1. No restriction on the usage of funds

No end-use restriction is one of the highlights of this financial product. It means borrowers can utilise these funds to meet an array of monetary requirements. This can include personal and medical expenses, funding business requirements, and plenty more.

  1. Competitive interest rates

The interest rate applicable on this credit instrument is competitive when stacked against its unsecured counterparts offering similar benefits. The reason is, it is a secured loan availed against gold items. The applicable interest rates, however, change with the choice of lender. Prospective borrowers can also take the assistance of online calculators to check how a change of interest rate affects their total borrowing. They can then make their decision accordingly.

  1. Flexibility in repayment

Typically, gold loans come with a repayment tenor of 3 to 12 months, but they can increase depending on the choice of lender. Alongside, this financial product also comes with different repayment options that include –

  1. Regular EMIs
  2. Paying interest upfront, and the principal at tenor’s end
  3. Paying interest periodically, then principal after the tenor ends

Apart from that, foreclosure and part prepayment facilities are also available with this financial product. This will aid prospective borrowers in completing their repayment without any hassle.

  1. Part release facility

Another highlight of this financial product that makes it stand out from the rest is the part release facility offered by NBFCs like Bajaj Finserv. Here, borrowers have the liberty to make a lump sum payment and get back a portion of pledged gold items. This facility is unique to gold loans and not available with any other secured credit options.

The gold loans as a financing method have increased in recent times, primarily owing to their borrower-friendly features. This trend is likely to continue as gold prices are on a higher side, paving the way to services a higher loan quantum to meet any requirement.

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