How to Get the Most Out of a Gold Loan: Key Things to Consider Before Applying

What Is a Gold Loan?

Earlier, during times of need, many individuals used to trade their gold jewellery or pure gold bars and coins to obtain funds. However, nowadays, with many financial institutions offering Gold Loans, it has become convenient to use our family's gold as collateral to secure funds during financial crises.

A Gold Loan is a type of secured loan extended by banks and Non-Banking Financial Companies (NBFCs), typically up to a specified percentage of the gold's appraised value that you offer as collateral. Since the loan is backed by the value of the gold, there is no risk of default for the lender. Consequently, many banks and NBFCs are inclined to offer gold loans at reasonable interest rates.

Furthermore, unlike other types of loans, there are no limitations on how the borrowed funds can be utilised, as long as the purpose is legitimate. Thus, the borrower has the freedom to use the loan for personal or business needs.

What Are the Benefits of Opting for a Gold Loan?

1. Quick and easy loan process as you can get funds swiftly by pledging gold with minimal documentation.

2. You can enjoy lower interest rates compared to unsecured loans, varying from 7% to 15%.

3. Financial institutions typically charge lower processing fees. Often, many lenders do not charge any processing fee at all.

4. You can borrow up to 75% of your gold's value, with some lenders having maximum limits on the loan amount.

5. You have the option to opt for flexible repayment, paying only interest during the loan period.

6. This is a multipurpose loan that can be used for various personal or business purposes without restrictions on the end-use of the loan amount.

7. It allows you to access funds without selling your gold; the asset is returned upon repayment.

8. You can renew the existing loan or seek a new one using the same gold. However, it is not possible to pledge the same gold with multiple lenders simultaneously.

9. Gold loans often don't require a good credit score or history, and some lenders perform only a soft credit check.

10. The lender keeps Your pledged jewellery securely in a vault, providing peace of mind.

Is Gold Loan a Good Borrowing Option? Should You Opt for a Gold Loan?

If you find yourself in an urgent situation requiring short-term credit, a Gold Loan can be your optimal solution. This makes it particularly suitable for business owners experiencing financial challenges, as they can repeatedly use the same gold as collateral for loans as needed, benefiting from flexible repayment terms and lower interest rates.

Nevertheless, exercising caution when frequently considering gold loans is crucial, ensuring that your financial discipline and repayment capacity are strong. Failing to meet EMIs on time or defaulting on repayments will negatively impact your credit score, and the lender retains the right to sell your asset to recover outstanding dues, potentially resulting in the loss of cherished family gold.

How to Get the Most Out of a Gold Loan? Key Things to Consider Before Applying for a Gold Loan

Thanks to quick and easy eligibility criteria and more favourable interest rates compared to unsecured loans, a Gold Loan represents a cost-efficient option for numerous individuals. Nevertheless, there are tactics to enhance the cost-effectiveness and overall benefits of your gold loan. Here's how you can get the most out of a Gold Loan:

1. Shop Around for a Better Interest Rate:

   The interest rate is an important consideration when applying for a Gold Loan, as it directly influences your repayment obligations. Due to its secured nature, gold loans typically come with lower interest rates compared to unsecured loans like Personal Loans.

   The specific interest rate for a Gold Loan can fluctuate between lenders, depending upon factors such as gold purity and prevailing conditions during the loan application. Generally, Gold Loan interest rates can range from 7% p.a. to 15% p.a. Hence, it is advisable to shop around, compare the interest rates offered by various lenders, and choose the one offering a favourable interest rate.

   Typically, banks extend lower interest rates in contrast to NBFCs. However, it's important to note that most banks levy a processing fee of 1% to 2% of the loan amount, which many NBFCs do not charge. Hence, in order to yield substantial long-term savings, it is advisable to assess the overall loan cost by comparing multiple lenders before making an informed decision.

2. Negotiate with the Lender:

   Prior to confirming your Gold Loan agreement, do not hesitate to engage in negotiations with the lender to decrease or eliminate processing fees, administrative charges, and associated expenses. Most lenders are open to such discussions, particularly if you have a good credit history or maintain a loyal customer relationship. Reducing these fees effectively can have a significant effect on the overall loan cost, resulting in considerable savings.

3. Choose the Repayment Option That Best Suits Your Financial Situation And Requirements:

   Most banks and NBFCs provide flexible repayment options for a Gold Loan, allowing you to select the method that best suits your needs and financial circumstances. Here are some of the most convenient repayment methods to consider:

   • Bullet Repayment:

     - With this approach, the borrower settles both the interest and principal amounts at the end of the loan tenure.

     - While interest is calculated monthly, the payment becomes due only at the conclusion of the loan term.

     - This method is ideal for those experiencing financial difficulties and already burdened with significant EMIs.

     - However, it's important to note that a substantial final payment of principal plus interest will eventually be due.

   • Pay Only Interest as EMI And Principal later:

     - Under this repayment method, borrowers can fulfil the interest portion of the EMI schedule on a regular basis.

     - The repayment of the principal amount can be done at their convenience by the end of the loan term.

     - This approach is beneficial for individuals facing financial constraints and aiming to avoid a substantial one-time payment.

   • Overdraft Facility:

     - The overdraft facility offers borrowers a line of credit that can be utilised as needed, with interest payable only on the utilised amount.

     - For example, if you have an overdraft facility of Rs 5 lakhs but use only Rs 2 lakhs, you will only pay interest on the utilised Rs 2 lakhs.

     - This option is suitable for business owners who require periodic working capital funds and are uncertain about the exact amount needed.

   • Regular EMIs:

     - In this method, borrowers are obligated to make monthly payments in accordance with the scheduled EMIs.

4. Know the Market Value of Your Gold:

   Numerous banks and NBFCs extend Gold Loans with varying loan amounts. The final loan amount is determined by the gold's assessed value, and higher gold purity translates to a larger loan amount.

   These financial institutions use their gold appraisers to assess the gold's purity, which serves as the basis for determining the sanctioned amount. Depending on the lender and the Loan to Value (LTV) ratio, borrowers can typically secure 75% to 90% of the gold's value as a loan amount.

   For instance, if your gold is valued at Rs 1 lakh, you can potentially obtain a loan ranging from Rs 75,000 to Rs 90,000. However, many banks have a maximum limit on the Gold Loan amount they can offer, so it is advisable to verify this before applying.

   Furthermore, a fundamental requirement is that the gold being pledged must have a purity level of 18 carats or higher quality, irrespective of its form, such as jewellery or coins. Being informed about the present gold rates can prove advantageous when seeking a loan using gold as collateral.

   Market fluctuations can influence the Loan to Value (LTV) ratio offered by the lender. To enhance your borrowing experience, select a period when gold prices are favourable, as a heightened LTV could potentially lead to a lower interest rate. Keeping track of market trends will empower you to make informed choices and reduce expenses associated with your Gold Loan.

5. Never Miss Your Scheduled Repayments:

   Maintaining a positive credit history is essential for your financial well-being. Ensure you make EMI payments on time to avoid late fees and penalties, as this practice safeguards your credit record.

   A good credit score will also work to your advantage when seeking credit in the future, granting you access to more favourable terms.

   Consider allocating surplus funds to make prepayments on your Gold Loan. Lowering the outstanding principal amount will result in reduced overall interest payments.

   However, before proceeding, confirm that your lender does not impose pre-closure charges. Some lenders even offer options that eliminate these fees for Gold Loan repayments. By strategically making prepayments, you can lower your financial burden and save money on interest expenses.

To conclude:

By using these tactics, you can get the most out of a Gold Loan, reduce borrowing expenses, and enhance your financial progress. Prior to moving forward, it is crucial to carefully review and comprehend the terms and conditions of your Gold Loan. Furthermore, it makes sense to seek advice from a financial expert as they can assist you in making well-informed choices and efficiently managing your Gold Loan.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.