India is famous for its gold and gold jewellery. The country is the second-largest consumer of gold after China. The yellow metal can be found at most of the people’s house and the same is used to borrow money in case of financial emergency. For years, people having borrowing money by pledging their gold jewellery whenever they need money urgently. Gold loans are the quickest and easiest way to monetize the gold and get money. Most of the banks offer gold loan at a lower interest rate and the amount is disbursed instantly. According to a report by KPMG, the gold loan market in India is expected to reach Rs 4,617 billion by 2022 at a five-year compounded annual growth rate of 13.4 percent. Let’s discuss the reasons in details why the loan against gold is a preferred option for many:-
What is a gold loan?
Gold loan is a secured loan which is taken by a borrower when he/she need funds in an emergency. When a borrower takes a loan, then he/she has to pledge their gold jewellery, which is in a range of 18-24 carats. Only gold jewellery can be pledged as security, gold bar or gold coins cannot be treated as collateral. A borrower gets up to 80% of the loan amount which is based on the current value of the gold.
- Lower interest rates and processing fees
Gold loan is offered at a lower interest rate when compared to other types of loan, especially personal loan. Gold loan interest rate starts from 7.50%. Gold loan is a secured loan due to which the lenders charge lower interest rate as they can auction the collateral in case a borrower defaults to repay the loan. A borrower also pays less processing fees when they opt for gold loan, usually, only 1.50% of the loan amount is charged as processing fee.
- Minimal documentation
When a borrower visits the lender for a gold loan, they are asked to submit the few general documents like identity proof, address proof and KYC documents. A borrower need not submit income statements, ITR statements or credit reports. The process is hassle-free and easy because borrowers gold ornament is considered as collateral.
- Foreclosure charge waived off
When a borrower decides to pay off the loan before the tenure gets over, generally a penalty is charged which is often termed as forclosure charges. However, most of the banks have waived off the foreclosure charges. A borrower can pay the loan whenever they want, lenders do not charge any penalty after three months.
- High LTV ratio
Loan amount in gold loan is decided by assessing the gold ornament which is pledged as collateral. The Loan-To-Value ratio of a gold loan is 80% as set by the RBI, though the LTV was raised to 90% due to coronavirus pandemic. The loan amount is decided after assessing the yellow metal according to the current market value of gold.
- Flexible repayment tenure
Gold loans are short terms loans which have short loan tenure which ranges from 1 month to 5 years however, the loan tenure varies from lender to lender. Also, lenders offer different schemes through which loan can be repaid. A borrower can decide whether he/she wants to interest through EMI, bullet repayment option where a borrower repays the principal and interest after one year or they want to pay the EMI and the principal amount at the end of the tenure.
- No credit score required
Speaking of the gold loan, one of the top benefits of the gold loan is that a borrower does not need to have a good credit score. Even if a borrower has a bad credit score then also he/she can get a gold loan. A credit score is a score which indicates the creditworthiness of a borrower, higher the credit score, better chances of getting a loan. The credit score is not important in the gold loan as a gold ornament serves as collateral and if borrower defaults to pay the loan then the gold jewellery is auctioned.
Conclusion: A borrower should consider gold loan over other types of the loan because of the above-discussed reasons only if they have gold jewellery lying in their house lockers. A borrower should also not worry about their gold jewellery as lenders keep it safe in their high vault lockers.