‘Au'lluring loans show their sparkling side

Pledging your gold for loan still continues to be an attractive option to raise funds.

It is not only your gold holdings that benefit from the recent spurt in gold prices. The mortgage value of your jewellery - the loan you can take by pledging your gold - also soars. In a high interest rate regime where banks are hiking interest rates, loans against gold continue to be an attractive option to raise funds for your emergency needs.

Leading gold loan providers in India have quite a few offers lined up to woo loan takers. One can now avail a loan up to Rs 1 crore against gold. Loans are offered at rates ranging from Rs 1,305 to Rs 2,025 per gram of gold. The rates offered on gold loans are far cheaper than those on personal loans.

Let's see how. For one, secured loans are always offered at lower rates than unsecured loans, which is why providing collateral in the form of gold, property and even shares/debentures helps in reducing interest rates on the loan.

In case of a default, when the borrower fails to repay the loan on time the lender has an option of confiscating the security provided. A personal loan, as an unsecured loan attracts a higher interest rate as the borrower doesn't provide any security to the lender.

In contrast to a personal loan where the bank offers a fixed interest rate, gold loan rates can change depending on the safety margin left to the lender. The lower the loan value to the worth of the gold you pledge, the lower the interest rate.

Depending on the net weight and the purity of gold you pledge, interest rates on gold loans can vary from as little as 10 per cent to as much as 17 per cent.

Thirdly , the best thing about a gold loan and other secured loans is that irrespective of your credit history you can avail a loan by providing security. The security can even belong to a third party including your parents, spouse, siblings and even friends.

The process

Gold loans are usually disbursed quite fast compared to most other loans. Without much paper work involved one can easily get a loan in a few minutes.

The only document required for a gold loan is personal identification proof. No other document is necessary. This makes gold loans a good option in case of medical emergencies where instant cash is required. However, more and more people are now opting for such loans whose tenure is not more than one-two years to finance goals such as children's education, buying a car or even to fund the down payment for a home purchase.

Each lender has their own method to calculate the value of jewellery pledged.

Some banks fix the gold price and revise it at half yearly or annual intervals irrespective of the market value of the jewellery. Others may have a more real-time system of taking an average of two weeks' market price to decide on the value of the jewellery. Some lenders even track the daily movement of gold prices in the international market to decide the value of collateral.

Payback time

Do note that the repayment plan for a gold loan may be quite different from other kinds of loans such as personal loans. Usually the principal can be paid at the end of the loan period in a lump sum, while the interest amount is repaid in the form of a regular monthly instalment.

For example, if you took a gold loan for Rs 2 lakh for two years at 12 per cent interest, then you would be required to pay Rs 2,000 per month for two years. But apart from paying this sum of Rs 2,000 every month, you will have to pay back the principal value of Rs 2 lakh at the end of two years.

Personal loans usually work on equated monthly instalments (EMIs) where the EMI for a loan of Rs 2 lakhs for two years at 12 per cent would be Rs 9,400. You need not shell out a lump sum at the end of the period.

Pick and choose

With specialised gold loan NBFCs as well as banks getting into the act, the borrower will need to make a conscious choice between lenders.

There are a few pointers to keep in mind before settling on a specific bank or NBFC for a gold loan.

- Check the interest rate being offered by the lender, it should be lower than a personal loan being provided by it.

- Taking a loan from an NBFC is considered far costlier than a bank, some of them extending it for interest rates as high as 33.6 per cent. So check in a public sector or a private sector bank for gold loan, for comparison.

- Check the loan to value ratio, that is, how much of the value of gold pledged is being offered as a loan. If you can restrict your loan amount to around 50 per cent of the market value of the jewellery then you may obtain more reasonable interest rates.

- As interest rates vary according to the quality of gold pledged, hallmarked jewellery may fetch you better rates. Banks prefer jewellery instead of gold coins while providing loans as the customer usually attributes some emotional value to the jewellery being pledged.

Opting for a gold loan instead of a personal loan is fast becoming a norm in both urban and rural India. The social stigma attached to pledging gold has almost disappeared and this is widely recognised as a quick and acceptable means of raising funds for meeting urgent needs.

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