The gold loan has been popularised in India for decades now. Yet most of them were managed and controlled by the unorganised sector, which included the local moneylenders and pawnbrokers. There were no policies or regulations to control their activities. It is only recently that the banking and finance sectors have been informed about the impact that gold loans have on the Indian economy.
Compared to the other retail loan products, gold loans are gaining faster traction, with the rising gold prices acting as a boon for the market. Borrowers can get loans faster as they can provide their gold ornaments as collateral. Lenders find it safer to lend money since the collateral is adequate to cover their risk.
Many banks as well as NBFCs (non-banking financial companies) have started offering gold loans at low-interest rates. The interest rate is as low as 7% per annum for gold loans in India because of the collateral provided. The tenure for these gold loans ranges from three months to four years, and you can avail of up to Rs. 1.5 crore as a loan, depending upon the value of the gold you keep as collateral.
Benefits of Taking a Gold Loan
Here are a few things you need to understand about gold loans:
Gold loans can be used for any purpose.
You can pledge your gold ornaments and get a gold loan whenever you face any kind of financial emergency. You can use the money for medical emergencies, educational purposes, or even to go on a holiday.
These loans are highly secure.
If you pledge your gold with a reputed bank or financial institution, you can rest assured that your gold is safe with them. Whenever you repay your loan, you will get your gold ornaments back in the same condition they were in when you deposited them.
There are numerous tenure options.
From 3 months to 48 months, you can choose any tenure option to repay your gold loan.
Like other loans, gold loans are also associated with certain fees, such as processing fees, valuation fees, and late payment charges. However, these amount to only about 2% of your loan amount.
Multiple Repayment Options
Most gold loan lenders offer various options for borrowers to repay their gold loans. These include:
- Regular EMI repayment
- Paying the interest amount upfront and repaying the principal loan amount at the end of the tenure
- Paying interest amount in monthly instalments and repaying the principal loan amount at the end of the tenure
If you repay your interest amount regularly, you might even get a 1 to 2% rebate on the original rate of interest.
Gold loans are often preferred by borrowers because of their quick disbursements, minimal paperwork, and flexible schemes. It is a hassle-free and easily accessible option for borrowers who wish to borrow small loans. However, there is something called loan-to-value (LTV) that you need to be aware of while opting for a gold loan.
What is loan-to-value (LTV)?
Loan-to-value, or LTV, is the ratio of the gold loan amount to the value of the gold that is being pledged. The RBI (Reserve Bank of India) has capped this at 75%. Nevertheless, this might change depending on the market rate of gold. If there is an increase in the gold rate, you can get more gold for the gold that you pledge. On the other hand, if the gold rate falls, you may have to pledge additional gold for the same amount of money.
Banks and financial institutions generally derive the value of gold by analysing the fluctuations in the gold rate over the past 30 days. They then evaluate the LTV by checking the purity of the gold that is being pledged. A professional loan evaluator is usually hired for this purpose.
The lender might ask the borrower to pay up the marginal difference or pledge more gold when there is a fall in the gold price. Not paying this up might make you a defaulter, thereby impacting your credit score. In case you fail to repay the loan even after 90 days after the end of your term, the lender might liquidate the pledged gold by auctioning it. However, it is highly unlikely for lenders to follow this route if the tenure of the loan is short.
Impact of gold prices on the Indian economy
Indians love gold. They buy gold all the time, be it for investing, for weddings or other festive occasions, or to offer as a gift to their loved ones. They consider gold a symbol of prosperity and good fortune.
Buying gold is a cultural norm for Indians. The amount of gold that Indians hold is more than what you can find in any other country in the world. 2.5 trillion Indian rupees’ worth of gold was imported by India in the fiscal year 2021. This is estimated to reach 3.4 trillion Indian rupees in the Fiscal year 2022.
As a non-productive asset, gold has a huge impact on the Indian economy. Most of the gold that is purchased in India either gets transformed into jewellery or is stashed away in safe boxes and lockers. Most people hold on to their gold to get higher returns on their investments or just to add to their wealth.
With the gold rate expected to rise in the forthcoming future, there are going to be more takers for gold loans. Make sure you make the most of your investment but do evaluate your financial situation and your repayment ability before borrowing your gold loan. Check out the Piramal Finance website for other options if you don’t want to pledge your gold.