What is a Gold Loan – Eligibility, Benefits and Interest Rates

Gold has become an indispensable part of Indian households. It is considered one of the best investments by people for generations. If you notice carefully, gold’s value is consistently increasing every year. But keeping that aside, did you know you can use your valuable gold as a security for a loan? In this article, we will discuss what is a gold loan and how it can benefit you in detail.

The following pointers will be covered:

• How does a gold loan work?
• Benefits of a gold loan
• What are the interest rates on a gold loan?
• Processing fee of a gold loan
• What is the tenure of a gold loan?
• How to apply for a gold loan?
• Eligibility criteria for a gold loan

So, let’s get started. By the end of this article, you will have a complete understanding of a gold loan.

How does a gold loan work?

A gold loan is a type of secured loan where gold jewelry or ornaments are used as collateral. In this type of loan, the borrower pledges his/her gold items with a lender, such as a bank or a non-banking financial company (NBFC), in exchange for a loan amount. The lender determines the loan amount based on the value and quality of the gold pledged. The loan amount provided is typically a percentage of the gold’s market value, and the loan tenure can vary from a few months to a few years.

Related read: Difference Between Secured and Unsecured Personal Loans

A gold loan has many benefits for borrowers. Let’s get into the details.

Benefits of a Gold Loan

The benefits of a gold loan are given below:

Quick and easy approval

Gold loans have a straightforward approval process. Since the loan is secured by gold collateral, lenders are generally more willing to provide loans, even if the borrower has a limited credit history or poor credit score. The documentation required is minimal, making the application process simple and fast.

Quick disbursal

Gold loans are known for their speedy disbursal process. Once the gold is evaluated and the loan is approved, you can receive the loan amount in your bank account or as cash within a short period, often on the same day.

Lower interest rates

Gold loans often have lower interest rates compared to unsecured loans like personal loans or credit cards. The interest rate is typically determined based on the loan-to-value (LTV) ratio, which is the percentage of the gold’s value that the lender is willing to provide as a loan. As the loan is backed by tangible collateral, lenders consider it less risky, resulting in lower interest rates.

Flexible repayment options

Gold loans usually offer flexible repayment options to borrowers. Depending on the lender, you may have the choice of repaying the interest periodically and settling the principal amount at the end of the loan tenure, or you can opt for regular EMI payments. This flexibility allows borrowers to choose a repayment plan that suits their financial capabilities.

High loan-to-value ratio

The loan amount you can obtain through a gold loan is typically a percentage of the gold’s market value. The loan-to-value ratio varies among lenders but can be as high as 75-90% of the gold’s value. This means you can access a significant amount of funds based on the value of your gold assets.

It’s worth noting that while gold loans offer these advantages, it’s important to assess your financial situation and consider the risks associated with pledging valuable assets. Defaulting on the loan can result in the loss of your gold collateral. Therefore, it’s essential to borrow responsibly and ensure timely repayment of the loan.

What is the Interest Rate on a Gold Loan?

The interest rate on a gold loan varies from lender to lender. However, the interest rate generally ranges from 9.24% to 17%. Compare the interest rates before choosing a lender for getting a gold loan.

Processing fee of a Gold Loan

The processing fee for a gold loan can vary among lenders and is usually calculated as a percentage of the loan amount. It typically ranges from 1% to 3% of the loan amount, although the exact percentage may vary depending on the lender’s policies and the loan amount.

For example, if you are applying for a gold loan of Rs. 10,000 and the lender charges a processing fee of 1%, you would need to pay a processing fee of Rs. 100 (1% of Rs. 10,000) in addition to the loan amount. The processing fee is generally deducted from the loan amount disbursed to you, so you receive the net loan amount after deducting the processing fee.

What is the tenure of a Gold Loan?

In general, the tenure for a gold loan is relatively short-term compared to other types of loans. The typical tenure for a gold loan ranges from a few months to a few years. It can be as short as 3 months or extend up to 5 years, depending on the lender. However, it’s important to note that longer loan tenures may come with higher interest rates.

How to Apply for Gold Loan?

Follow these simple steps to apply for a gold loan:

• Start by researching different lenders, such as banks or non-banking financial companies (NBFCs), that offer gold loans.
• Compare their interest rates, loan-to-value (LTV) ratios, processing fees, repayment terms, and customer reviews to select a reliable and suitable lender.
• Prepare the required documents for the loan application. The documentation may vary among lenders.
• Visit the lender’s branch or apply online.
• Fill out the loan application form provided by the lender. Provide accurate information about yourself, the gold you wish to pledge, and other required details.
• After submitting the application form, the lender will assess the purity and value of the gold items you intend to pledge.
• Once the lender completes the gold assessment and verifies the provided documents, they will approve the loan based on the value of the gold and their internal policies.
• Upon acceptance of the loan offer, the lender will disburse the loan amount to your bank account or provide it in cash as per your preference.

Eligibility Criteria for Gold Loan

The eligibility criteria for a gold loan may vary among lenders, but here are some common factors that lenders consider when assessing eligibility:

• Ownership of gold
• Type and purity of gold
• Loan to Value ratio
• Credit History
• Age limit (varies for every lender)

It’s advisable to consider your financial situation and repayment ability when selecting the loan tenure. Additionally, some lenders may offer flexibility in the loan tenure, allowing borrowers to repay the loan or extend the tenure if required. It’s important to clarify the terms and conditions regarding the loan tenure with the specific lender before availing of the gold loan.

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Also read: What Is an Unsecured Personal Loan?