Rates may be lower than personal loans; loan-to-value may also be less.
Gold loans seem to have suddenly caught every lender’s eye. Financial institutions, non-banking finance companies (NBFCs) and banks alike, have been vying to lend against the security of gold.
However, the pertinent question is are loans against gold worthwhile? In recent months, these loans have gained popularity, due to various reasons - the continuous increase in gold prices, the liquidity crunch in a recession-like market, a rising number of players in the space. leading to easy availability of the option and faster disbursals - among customers for funding short-term requirements.
| THE RATE WAR | ||
| Bank | Gold Loan Int Rate (%) | Personal Loan Int Rate (%) |
| SBI | 13.75 -14.25 | 14.50 |
| Indian Bank | 13.25 -14.25 | 14.25 - 17.25 |
| ICICI Bank | 14 - 15 | 14 -18 |
| IOB | 14 | 15.75 |
| Canara Bank | 14 | 12-16 |
THE POSITIVES
Many institutions have been promoting the quick-disbursal and minimum documentation features as the main attraction. Let’s list the advantages, the first being safety. While an individual is able to liquidate his gold into money for short-term needs, it also reprieves him from worries about safety of physical gold, apart from relief on storage cost. Two, gold loans are disbursed quickly, irrespective of the borrower’s credit history, and at reasonable rates.
Third, gold loans do not necessarily operate on the equated monthly instalment (EMI) model, thereby helping borrowers to save on interest costs. These loans are given on a simple interest basis. For example, if you took an interest-only loan of Rs 2 lakh for two years at 12 per cent yearly, your monthly payment will be Rs 2,000 (total interest payable for Rs 24,000 for one year, Rs 48,000 for two years), but you will need to repay the loan with a lumpsum payment of Rs 2 lakh at the end of two years. Whereas, the EMI for a two-year loan at the same interest rate would be around Rs 9,400 (without any obligation to pay the lumpsum at the end). Thus, this feature helps in keeping the monthly commitment low for a borrower as against an EMI-based loan, whereby the repayment commitment begins from the next month itself.
Also, in the current interest rate scenario, loans against gold are cheaper than personal loans. The table on the right illustrates the interest rates offered by some leading banks under both these segments.
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Another plus is that, typically, the underlying asset for most loans depreciate in value over time (for instance in the case of car loans). Property loans and gold loans are an exception to this feature. Even when gold has been mortgaged for the loan, if gold prices were to rise during the interim, the borrower continues to participate in the upside.
One big plus is the avoidance of a debt trap. At any point, if the borrower is unable to service the loan and the interest thereon, he/she could ask the lender to keep the gold and be freed from the liability. The cycle of non-payment and refinancing at higher interest rates does not happen in this case. Thus, the borrower need not look at options to refinance the debt and get caught in traps.
Another very appealing factor for gold loans is that a lot of institutions do not apply any charges if the borrower wishes to prepay at any point in time.
AND THE NEGATIVES
As for the negatives, one is that these loans are attractive as long as the ‘margin of safety’ is within reasonable limits. Typically, the rates would be lowest when the amounts borrowed do not exceed 50-60 per cent of the market value of the gold. In other words, the more gold/gold jewellery is pledged for the same amount of loan, the lower will be the rate. Thus, the rates could vary between 10 and 17 per cent per annum.
A second drawback is that gold and its ownership carries a lot more value, emotionally, than the financial one. The possibility of losing this pride, in case of any unforeseen factors affecting the loan repayment capability, deters many from resorting to gold loans. Three, although loan disbursal by NBFCs may be quicker as compared to other channels, the rates offered by such institutions are higher than the traditional channels.
With high collections raked in through the non-convertible debentures offered by NBFCs in recent months, it would not be surprising to see a higher promotion of gold loans in the coming times. More, these loans provide an excellent opportunity to liquidate investments without having to let go of their ownership.
In conclusion, there are a fair amount of both positives and negatives attached to the option. Consider it only when others do not seem feasible.
The writer is a certified financial planner