A gold loan is a secured loan. It is similar to a mortgage loan as the borrower keeps their gold as collateral with a lender and avails capital. Generally, a gold loan has a shorter term, with the tenor typically ranging from 3 months to 24 months. In the case of a gold loan, the interest rate is lower compared to other forms of loans primarily with banks. 

How Does A Gold Loan Work?

The interest rates on gold loans currently range between 8-30%, depending on the lender. However, this could change depending on the monetary policy (i.e., repo rates). Typically, banks charge lower interest rates compared to non-bank lenders (NBFCs).

When you need funds urgently, consider using your gold as collateral to obtain your needed funds. Gold loans are secured loans extended by most banks and Non-Banking Financial Companies (NBFCs). The lender assesses the present market value of the gold and ascertains the loan amount. Such a loan assists you in getting access to cash instantly. Let us analyse the multiple features and perks of gold loans, the process of applying for the loan, and more.

Features of a Gold Loan

The principal features of gold loans include:

Attractive Interest Rates

Since gold loans are safe, lenders charge lower interest rates than those charged on unsecured loans.

No Credit Score and Income Proof Requirements

Lenders do not require credit scores or monthly income information to sanction gold loans. Instead, they estimate the loan value based on the gold provided as collateral by you.

Safety of the Pledged Gold

Lenders protect and shield your pledged gold by bottling it in heavy-duty safety vaults. They return your collateral once you repay them the loan amount.

Loan-to-Value (LTV) Ratio

The Reserve Bank of India (RBI) has mapped the LTV ratio at 75%. So, if your pledge gold is worth ₹1 lakh, you can get a maximum of ₹75,000 as a gold loan, usually banks lend at lower LTV in bullet repayment product.

Minimal Paperwork

You can apply for gold loans with minimum essential documentation like identity and address proof to complete the Know Your Client (KYC) procedure. Lenders generally do not require income proof or bank statements to determine eligibility.

Versatile End-Usage

You can use the loan amount to bear the expense of anything without worrying about end-use limitations.

Faster Processing

You can get the money you need within minutes. The lender checks the weight & purity of the gold and disburses the loan amount immediately.

Zero Foreclosure or Prepayment Charges

You can pay back your gold loan interest and principal amount anytime without worrying about foreclosure or prepayment charges. Most of the lenders don’t charge.

What are the Advantages of Taking a Gold Loan?

Gold loans’ multiple benefits make them an attractive financing option for borrowers. The most popular ones include the following:

Secured Loan Benefits

Loans are either secured or unsecured. Unsecured loans require no collateral, but you must fulfil stringent eligibility criteria and have higher interest rate. As a gold loan is a secured loan, lenders do need collateral. However, they typically sanction the loan quickly.

No Need for a Credit Score

The only prerequisite you need to comply with when applying for a gold loan is holding gold in the form of coins, jewellery, etc. Many gold loan lenders do not assert credit scores, contributing to the immense popularity of these loans. However, you can obtain a loan even if your credit score is relatively low.

Reusing the Same Gold Repeatedly

Once you repay the loan amount and get back your gold, you can use the same gold to acquire another loan. One good thing is that since gold’s market value decides the gold loan amount, you can get a higher loan if the gold price increases.

Flexible Repayment Terms

In gold loans you may only pay the interest component in instalments during the loan period and pay back the principal loan amount as a lump sum when the loan matures or can pay the whole principal and interest amount at loan maturity. Most of the lenders provides various gold loan schemes, you can avail any scheme depending upon your need and comfort. Moreover, you can also prepay the principal amount partially during the loan tenure and reduce your interest amount. This attribute makes a gold loan an excellent, pocket-friendly option.

Consequences of Not Repaying a Gold Loan

While there are several benefits of gold loans, and the loan is easy to obtain, you must ensure you repay it on time and in full. If you fail to repay your gold loan, you may bear the following consequences.

Persistent Reminders

Lenders generally send repeated reminders via calls, SMS, emails, and notices to borrowers who fail to repay the gold loan.

Penal Interest Charge

Lenders may levy penalties if you fail to repay the interest on the loan during the stipulated loan term.

Possibility of Legal Action by the Lender

Lenders may also send a legal notice if you have yet to respond and make payments despite repeated reminders. 

Gold Auction

If nothing else works out, the only remaining course of action the lender resorts to is auctioning your gold to recover or offset the losses incurred from the loan. Lenders typically inform you about the auction two weeks before the auction date.

Impacts Your Creditworthiness

Lenders do not ask for your credit score when you apply for a gold loan. However, they submit the loan repayment details to credit bureaus and non-repayment of the debt can impact your credit score and subsequent credit-obtaining abilities.

Why is a Gold Loan a Better Option Than Other Types of Loans?

Due to faster processing and lower interest rates, a gold loan is a preferred way to borrow money. The gold item is kept safe with the lender till the closure of the loan. Lenders offer up to 75% of the value of the pledged gold as the loan amount. It can be higher than, say, land or real estate, or other collaterals, where the loan offered can be lower as a proportion of the asset’s value.

Fundamental Steps to Avail a Gold Loan

Application

Anyone who wants a gold loan can apply at a bank or a non-bank lender. Applicants can either go to the lender branch or apply online, which is the most favoured option in urban areas.

Evaluation

All banks and financial institutions first check the purity and weight of the gold. Then, after completing your application, they will disburse the loan. In case of doorstep based gold loan, representative will visit your home to check the documentation and examine the gold’s weight & purity, and basis eligibility loans gets disbursed.

Documentation

The lender completes the KYC process per the RBI’s norms.

Approval and Disbursement

The loan is approved after the applicant agrees to the loan amount and other charges. Gold loans come with a processing fee of 0-1% of the loan amount depending upon the lender.

What Documents are Required?

The applicant needs to furnish the following documents to avail a gold loan:

• Aadhaar card
• Identity proof: PAN card, passport, driving licence, or voter ID
• Address proof: passport, driving licence, electricity bill, or gas bill

Notably, “proof of income” is not mandatory to obtain a gold loan. 

Who is Eligible for a Gold Loan?

A lender grants loans against gold to professionals, self-employed people, business owners, and others. Any individual who has gold jewellery is eligible to apply.

Moreover, a poor credit score usually doesn’t matter as this is a secured loan backed by gold. 

How is a Gold Loan Repaid?

There are four ways to repay a gold loan:

Pay Periodic EMI

It includes payment of both the interest and principal amount every month.

Pay Interest First and Principal Later

Follow the repayment schedule to repay the interest and pay the principal at maturity. 

Partial Payments

Make a partial or complete payment of interest and principal amounts, irrespective of the repayment schedule. For example, you can repay the principal amount first and then pay the total interest. 

Bullet Repayment

Repay the principal and interest amount at the end of the loan’s tenure.  

Account Closure

A gold loan account is closed when the borrower deposits the outstanding principal and interest amounts. The lender gives the collateral gold back to the borrower and receives the acknowledgement after the closure of the loan account is confirmed.

Keynote: A gold loan is one of the finest options for short-term financial requirements. It is a good choice for people in business and salaried individuals. Various benefits, such as lower rate of interest, quick and easy process, flexible repayment method, gold offered as collateral, the option to pledge the same gold as security multiple times, soft credit checks, and flexible loan amounts, make it one of the best choices. But before you apply for a gold loan, research well and choose the one that offers a reasonable interest rate. Read and understand the features, advantages, and terms and conditions to avoid discontent at a later date. Also, once you get the gold loan, pay it without defaulting.

Conclusion

It is easy to avail a gold loan and requires minimal paperwork. Moreover, the borrower’s credit history has no bearing on the approval process, the amount, or the rate of interest charged. 

While there is a vast unregulated market comprising local lenders and pawn shops, taking a gold loan from a reputable lender is advisable, as they offer a hassle-free process with attractive interest rates and a very nominal cost. 

More importantly, such lenders keep the pledged gold jewellery safe in secure vaults, so there is no risk of theft or damage. It ensures borrowers get their precious jewellery safely back when they repay their loan and close the account.

Frequently Asked Questions (FAQs)