Know You Loan: Things To Know Before Applying For A Gold Loan
From a lender’s point of view as well, gold loans are less risky as they have an option to liquidate their gold by auctioning it according to RBI guidelines.
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The pandemic injected a huge demand for gold loans in the country. Despite the cultural and sentimental value associated with gold, businesses and households alike turned to gold loans to tackle financial challenges. Proof to this, is RBI’s data on credit that shows outstanding loans against gold jewelry given by banks rose by 82 per cent to Rs 60,464 crore as of March 2021.
Consequently, banks and non-banking financial companies (NBFCs) rolled out various gold loan schemes for people. As the demand for gold loans continues to rise, there are some things to know before applying for a gold loan:
Why Gold Loan?
Gold loans are a viable option for those who aim to avail small loans with low ticket size when other modes of payment are unavailable to them. They are less risky and have flexible repayment options for borrowers. During the pandemic particularly, gold loans have proven to be extremely useful as economic activities had faced a downfall. They are quick, easy and usually accessible, depending on the path that the customer wishes to take.
From a lender’s point of view as well, gold loans are less risky as they have an option to liquidate their gold by auctioning it according to RBI guidelines. During uncertain times, access to gold loans can help customers meet their financial requirements.
How does a gold loan work?
The traditional method to evaluate gold is using nitric acid and stone to identify the purity (24k, 22k, 20k,), after which, a Loan to Value is decided that is usually not more than 75% of the gold value. A credit line is then given to customers like a bank OD for which customers will pay interest rates either fully or in part depending on the scheme selected. Once the loan tenure is over, customers can either close the loan by paying the outstanding amount or renew the loan by paying the interest.
There is no limit to repledging the gold, the loan can be renewed as many times as the customer wants it to. In fact, some banks & NBFCs even allow the customer to partially release their jewelry and keep the loan for the remaining amount.
How to get a gold loan in India?
1. Visiting a Bank/NBFC branch
The customer can visit the bank or an NBFC and request for a gold loan. The steps to apply for a gold loan include filling an application, submitting documents (Aadhar/PAN) for verification and gold evaluation. ,the bank then decides the maximum rate per gram (RPG) that can be availed with the amount of jewelry customers have. This is usually 60% of the gold price of the day also known as Loan to Value (LTV). Once the customer agrees to the loan amount, they're given 2-3 schemes with varying interest rates and LTV, depending on the payment cycle. Once the scheme is finalized, the loan is processed and transferred to the customer's account.
2. Apply for a gold loan digitally.
As more and more customers move online for their banking needs, gold loans too, have been digitized. People now have unhindered access to credit against gold. They can even opt for gold loan delivery, wherein upon registering, a loan manager/valuation manager visits the customer at their doorstep and the entire process of gold loan valuation is conducted in front of the customer followed by a price quotation.
The consumer can then choose a scheme that suits them best. After agreeing to a loan amount, the gold is deposited with the bank/ loan manager and amount is credited to the customer’s account.
There are majorly two schemes in most banks - Fixed and Jumping Interest Schemes.
In fixed schemes, customers pay their due interest before the loan tenure (duration of loan usually ranging from 3-12 months) is over. The interest rate throughout the loan tenure stays the same.
In jumping interest schemes, the interest rate will jump higher in case the customer makes a default (example: missing the interest payment). In these schemes, the starting interest rate is usually lower than that of a fixed interest scheme, but it could jump higher with defaults.
NBFCs/BC Partners also bring in tailor-made schemes for customers to attract potential customers.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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