Gold loans: What every first-time borrower should keep in mind?

Deepak Singhal, Sr. VP - Business, Rupeek

Gold is a prized commodity due to its high value and long history of being woven into cultures for thousands of years. People have owned and stored gold for a variety of reasons throughout the years. Gold’s worth has been perpetuated by societies and now economies place a value on it which makes it a reliable asset for investment. A gold loan is a quick and easy way to meet instant financial requirements at low-interest rates. With the advancement of fintech platforms, the long process of attaining gold loans has now been made accessible, seamless, and hassle-free.

Before taking a gold loan, however, a borrower should properly analyse the options available from several lenders and select the one that best suits their requirements. Here are a few things to consider before availing of a loan against gold:

Purity and Loan to Value (LTV) ratio for the gold: The amount of the loan is determined by the gold’s value and it is directly proportional to its purity and the loan-to-value ratio an institution can provide. New-age fintech and banks have started doorstep gold loans, where the gold is inspected and valued at the borrower’s home, leading to the partner banks approving the loans post due diligence in minutes, followed by loan amount disbursal to the account of the borrower.

The loan-to-value (LTV) ratio of gold is capped at 75 per cent. While several banks and non-bank financial companies (NBFCs) offer gold loans, the amount varies as per the lender. The final loan amount is determined by the LTV ratio.

Easy repayment options: When taking out a gold loan, it’s critical to look at the repayment options. One can pick between regular EMIs and bullet payments to repay gold loans. Customers can choose repayment choices that are appropriate for their financial state and cash flow. In addition to the traditional EMI repayment method, technology backed NBFCs allow borrowers only to pay their interest each month, leaving the principal component reimbursed at the maturity date.

Choose a comfortable loan tenure: As gold loans are short term loans, the repayment term ranges from 6-18 months. It is recommended that an individual choose the loan term based on their expected future cash flows, and how much time they would need before having enough capital to pay back.

Minimal processing fee charged: Most institutions additionally charge a variable processing fee that varies depending on the total amount of the gold loan. Thanks to many NBFCs, many platforms take less processing fees for gold loans.

Renewal of gold loans: Depending on the borrower’s repayment history and the existing interest rates, they might obtain a new loan amount or better interest rates while renewing an existing loan contract. Renewal of a gold loan is a terrific way to take advantage of the current relationship with lenders while still receiving financial assistance for the requirements.

Partial release of gold: In the case of a wedding or a cultural event, an individual can get a part of their asset or their entire holdings from an ongoing loan, released for use. When the loan period is up, the loan provider’s representative will collect the ornament as collateral.

Security and trust
Choosing the correct lender can be difficult because there are so many banks and NBFCs that offer gold loans. With secured credit being the new way to go, new-age fintech platforms provide plans that cater to a variety of borrowers as compared to traditional institutions. The promised gold is kept safe and secure by the banks and NBFCs in their secure lockers. The gold is kept in the lockers of the associated bank by fintech businesses. The lender provides the borrower with insurance and pays the premium.

Through a network of bank branches and regional offices, financial institutions that provide doorstep gold loan services provide maximum convenience and privacy for their consumers. The gold is also fully guaranteed against theft or accident during transportation from and to the doorstep, thanks to high-tech approved processors. To ensure ultimate safety, the gold is kept under bank-grade security and observation.

Recourse during repayment issues
While lenders usually consider the credit score to be a significant aspect in determining the creditworthiness of the borrower, the situation with gold loans is a little different. To begin with, it is a secured loan in which the borrower is expected to give their gold jewelry to the bank or financial organisation from whom they are seeking a loan. On the contrary, a borrower’s CIBIL score might be improved with the aid of a gold loan if repayment regulations are followed properly. Bullet payments are one of the best options as they have no effect on credit score for the duration of the loan.

If someone is unable to pay their loan on time due to unforeseen circumstances, the corporation is liable to apply a penalty rate of interest on the loan amount from the due date of the loan. In many situations, if complete repayment of the loan is not made within the loan period, the firm has the right to sell or otherwise dispose of the gold at the borrower’s risk and expense by public auction. However, lending institutions will notify the borrower a couple of weeks before auctioning the pledged gold.

For short-term cash needs, a gold loan is one of the greatest solutions accessible. With the rapid progression of fintech platforms, gold loans are creating a path to provide secured credit to millions of Indians. Customers can use the funds to pay for any type of expense since there are no end-use restrictions. However, before promising valuable gold, the borrower should make sure that they have the resources to pay back the loan.

Views expressed by Deepak Singhal, Sr. VP – Business, Rupeek.

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