Loan Basics. More glitter in gold loans

After three years of falling sharply, gold prices have risen over 20 per cent this year, making the yellow metal the best performing asset class so far in 2016. And in case you are in need of funds at short notice, a gold loan is not a bad idea at this juncture compared to getting a personal loan.

Banks and non-banking financial companies (NBFCs) in India offer gold loans. The purity of the gold you offer is verified and the loan amount sanctioned accordingly.

The Reserve Bank of India’s notification released in January 2014 says that up to (maximum) 75 per cent of the value of gold pledged can be given as loan by both banks and NBFCs. This is called the loan to value (LTV) ratio. That is, if the price of gold is ₹3,000 per gm and you pledge, say, 50 gm (total worth ₹1,50,000), then you are eligible for a maximum loan of ₹1,12,500 (75 per cent).

However, institutions may have their own limits. For instance, Shriram City Union Finance, an NBFC, offers a maximum of up to 60 per cent of the net value of the gold. Ranjit Punja, CEO and co-founder, CreditMantri, says, “Volatility in gold price at the time of taking the loan plays a significant role in determining the LTV ratio. More volatile the prices, less the LTV ratio.”

The process involves minimum documentation on the part of the borrower. This is because gold loan is a secured product and you give the institution physical gold as collateral. Your photograph, identity proof and address proof are the documents to be submitted with the loan application form. This is one of the major advantages vis-a-vis the personal loan, where you will be asked to give income proof, income tax returns (Form 16), etc.

Being a secured loan, chances of it being sanctioned are high, whereas in the case of a personal loan, the probability of it getting rejected cannot be ruled out.

Puru Vashishtha, Board Director, Deal4loans, says, “You don’t get a personal loan if your credit score is not good. But a bad credit score is not a deterrent for getting a gold loan.”

The interest rates and other charges like processing are less for gold loans compared to personal loans. In banks, the interest rate for gold loan ranges from 11.2 per cent (State Bank of India) to 14.5-17 per cent (Axis Bank). This is lower than for personal loans where interest rates can go over 20 per cent. However, some NBFCs charge a higher rate for gold loans compared to banks. For Muthoot Finance, the interest rate for a 12-month scheme ranges from 21 to 24 per cent.

The processing fee is between 0.5 and 1 per cent of the loan amount, which is half the fee levied for personal loans. There is no prepayment charge in case of gold loan. But you may be slapped with a charge for prepaying your personal loan. ICICI Bank, for instance, charges 5 per cent of the outstanding loan amount as prepayment charge.

Gold loan tenors are short compared to personal loans. They cannot exceed 12 months in case of banks as per RBI norms. But NBFCs like Muthoot Finance offer gold loans for a 36-month tenor if you opt for equated monthly instalment (EMI) schemes.

Unlike personal loans which are repaid only in the form of EMIs, gold loans have other options as well. One, you can pay the interest upfront and repay the principal amount at the end of the loan tenure while you redeem your gold.

The second option is that you can pay the interest component alone every month and the principal amount at the end of the loan tenor. The mode of repayment can be decided when you apply for the loan.

Repayment of the principal at the end of the loan tenor, zero prepayment charges and lower interest rates compared to personal loans are the three major advantages of gold loans, according to Ranjit. Lower processing fee, minimum documentation and less time for approval are the other positives.

However, there is a flip side too. In some cases, if the gold price has dropped very sharply during your loan tenor, then you may be asked to park more gold or pay cash to maintain the LTV.

“Certain banks and NBFCs enter into agreements with customers that if the value of gold falls beyond a certain limit, the interest rates may change accordingly,” says Puru. “But the probability of such occurrence of gold price crashing within the short loan tenor of 12 months is very less,” adds Ranjit.

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