Gold loans provide quick liquidity but borrowers should carefully review interest rates and terms.
It has emerged as a very common form of borrowing where people are offered instant money through a loan against gold jewellery. Though it may appear to be an easy and speedy transaction, financial experts caution borrowers to go through the terms and conditions.
A gold loan enables an individual to raise funds against gold ornaments deposited with banks and NBFCs depending upon their market value.
The Working of Gold Loans
Through gold loans, banks assess the quality and quantity of gold that is mortgaged in order to give a loan in the form of a certain percentage of its market price.
In general, borrowers maintain ownership of the jewellery until they repay their loan before the expiry of the tenor period.
Gold loans are mainly taken for:
- Emergency purposes
- Medical expenses
- Working capital requirements
- Short-term money needs
Gold loans take a shorter period to process than unsecured loans.
Rates of Interest Can Differ Drastically
Although interest rates offered by lenders can be quite attractive, the actual cost depends on many variables that include loan term, repayment method, among others.
Interest can be levied through:
- Monthly EMI Installments
- Repayment via Bullet Method
- Variable Repayment Schemes
There can be great variations in the total repayment amount based on the method used.
Relevance of Loan-To-Value Ratio
Generally, the percentage of gold’s value that could be used for a loan is regulated. This is what is known as Loan-To-Value ratio.
The gold prices could affect the lending amount as well as the repayments.
Declining prices on gold in the period of the loan would result in margin calls.
Additional Costs to Watch Out For
It is important for borrowers to be aware of additional costs that may come into play other than the interest cost.
The list includes the following costs:
- Processing cost
- Valuation cost
- Renewal cost
- Late payment penalty
Understanding these costs can help avoid unexpected financial burden later.
Possibility of Loss of Pledged Jewellery
Non-payment of the loan during the loan period can lead to the lenders selling the pledged gold to get their money back.
Financial experts advise borrowing after considering repayment abilities and going through the loan terms carefully.
Suitable Scenarios for Taking Gold Loans
Gold loans might be applicable when one is in need of money urgently but does not wish to sell the valuable asset.
Comparing loan terms between different lenders, as well as knowing the terms of repayment and all costs involved, may be helpful in decision-making.
Conclusion
Though gold loans offer quick financing options, it is important to be aware of the total costs of taking the loans.
Disclaimer
As such, before coming up with any conclusions regarding this report, you are highly advised to check out our “Terms & Conditions” section that can be accessed via our website. In addition, it is important to note that this article is purely for informational purposes and uses financial data that are publicly accessible for reference purposes.
