If you face a temporary cash crunch and are in an urgent need of funds, you can use the gold sitting in your locker to tide over your cash flow issues.
Banks and non-banking financial companies (NBFCs) offer gold loans for tenures as short as three months to as long as five years. Interest rates range from 8.8% to 18%, depending on the lender, the purity of the gold, and loan-to-value (LTV) ratio, among other things.
Factors that determine interest rates
While you don’t need a credit history to apply for a gold loan as it is a secured loan (that is, disbursed against collateral), a high credit score can help you secure a slightly lower interest rate.
There is also a processing fee of between 0.25% and 3% of the loan value. While lenders are allowed to offer a loan up to 75% of the value of the gold, they may choose to be more conservative, based on their internal risk-mitigating safeguards.
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Assuming a lender offers an LTV of 75%, 20 grams of gold – valued ₹1.54 lakh at current prices – would make you eligible for a loan of ₹1.15 lakh. An LTV of 75% is high compared to those of other types of secured loans thanks to gold’s status as a safe-haven asset.
Other things to keep in mind
It’s important to remember that a higher LTVs typically means a higher interest rate. A higher LTV means the lender is offering more money against the gold and thus taking on more risk.
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The purity and authenticity of the gold are also important factors. “You can take a loan against gold that is between 18 and 24 karats. Gold bought from verified makers and pledged with the original bill has a higher chance of getting you the maximum loan amount,” said Raj Khosla, founder and managing director of MyMoneyMantra.com.
Changes in gold prices also have a bearing on the maximum size of the loan you can get. When gold prices go up, the LTV ratio goes down, which means borrowers can get more credit for the same amount of gold. But if gold prices fall, borrowers may have to pay back their loans sooner or put up more gold as collateral to keep the LTV below 75% or a lower limit specified in the loans’ terms and conditions.
Khosla added that borrowers should check the robustness of the lender’s gold storage facilities. “Familiarise yourself with the gold release process upon repayment to ensure secure and straightforward reclaiming of your asset,” he said.
In most cases, the lender will insure the gold to counter any contingency, but be sure to check for this.
Flexible repayment options
Most lenders offer flexibility on repayments for gold loans. Lenders also offer repayment options other than equated monthly installments (EMIs).
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“One such option allows borrowers to repay the interest amount every month while leaving the principal component to be repaid on the maturity date. Another option allows borrowers to repay the interest component upfront when the loan is sanctioned and the principal component at the end of the tenure. Some gold loan schemes also allow the flexibility of repaying both the principal and interest components at the time of loan maturity or before that,” said Sahil Arora, chief business officer, secured lending, Paisabazaar.
“As gold loan EMIs consist of both interest and principal components, the interest cost of EMI-based repayments will be lower than that of non-EMI-based ones. Thus, borrowers with high income certainty and repayment capacity should go for EMI-based repayments,” Arora added.