Quick, easy and low-cost: Gold remains top option to raise emergency funds

For Indians, gold is more than just a flashy ornament — it’s a prized emotional possession. According to the latest estimates by the World Gold Council, households in the country hold 24,000-25,000 tonnes of gold, which makes us the largest holders of the yellow metal in the world. Many people in India regard the yellow metal as a fallback investment option that they can use during financial emergencies. 

Gold jewellery and coins can be pledged as collateral for taking a form of loan that is popularly known as gold loan. This short-term loan has emerged as a preferred tool for dealing with urgent business and personal contingencies. 

Better than a personal loan: Typically, lenders give up to 75 per cent of the value of the gold as loan after checking its purity, weight and market price. A loan against the yellow metal is a better option than a personal loan as processing time is quick and documentation required is minimal. Many lenders don't even check the borrower’s credit bureau score or ask for proof of income.

Avoid money lenders and pawn shops: Check your lender’s credibility before applying for a gold loan. The country’s gold loan market is still dominated by local informal players (money lenders and pawnbrokers), though the share of organised lenders is increasingly rapidly. What if the lender with whom you entrust your jewellery turns out to be a fraud or is unable to ensure its security? Today, you also have the option to approach the well-established NBFCs and banks that are regulated, have proper safekeeping facilities, and are governed by standard, customer-friendly policies and processes.

NBFCs offer higher loan amount: Even if you decide to borrow from a reputed NBFC or bank, you still need to compare and evaluate the offerings of various lenders before homing in on the right one. Some NBFCs focus primarily on gold loans. These lenders offer a higher valuation (higher gold loan per gram) and have more flexible repayment options compared to banks. The Reserve Bank of India (RBI) prescribes a standard loan-to-value (LTV) ratio of 75 per cent for banks and NBFCs. The latter, however, are more flexible in their assessment of the value of jewellery and hence, give a higher loan amount. Banks on the other hand, offer a lower rate of interest, especially if the borrower takes the loan for agricultural purposes. Opt for an NBFC if you are looking for a higher loan amount and choose a bank if you are a rate-sensitive customer. 

Flexible repayment options available: While comparing loan offers, take into consideration the repayment terms to plan your finances smartly. Four kinds of repayment structures are usually available. One option is to opt for regular equated monthly instalments (EMI). There is another option where the borrower pays the interest portion as EMIs and the principal in full at the time of maturity. Then there’s bullet payment, where the borrower pays the entire interest and principal at the end of the loan term. Many lenders have also started offering overdraft facility on gold loan, which makes it especially attractive for business persons and self-employed professionals. A regular EMI option is best suited for salaried individuals who are capable of paying uniform monthly EMIs. Others should choose from the multiple options available based on their fund flows.

Not all forms of gold are accepted: Pledged gold should have minimum purity of 18 carat. Higher the purity of gold, higher the loan amount one can get. Choosing high-purity or hallmarked jewellery will maximise the loan amount you are eligible for. You won’t receive the value of the gems that adorn the ornament. The weight of your jewellery is calculated after deducting the value of gems. A diamond jewellery piece, therefore, may not be the right candidate for taking a loan. Banks and NBFCs can lend only against ornaments and not against gold bars. Gold coins are accepted, only if they are 99.99 per cent pure and weigh not more than 50 grams.

Know all charges beforehand: A gold loan is usually availed to meet an immediate liquidity crunch. Borrowers may want to retain the flexibility of repaying the loan when they have extra funds available. Always compare prepayment and foreclosure clauses of lenders beforehand to ensure that you do not incur hefty charges when you decide to prepay. Prepayment penalty can range from nil to one per cent of the loan amount and varies depending on the lender and scheme. Similarly, lenders also charge processing fees and valuation charges, which raise the total cost of this loan. 

Be prepared for price fluctuations: Gold is prone to considerable price fluctuations. What if gold prices fall steeply? In such a situation, lenders usually ask for more collateral to maintain the LTV. They can also ask for part payment of a nominal amount. Though difficult to predict, one needs to keep track of gold prices and expected trends, especially when borrowing a considerable amount.

Lenders can auction gold: Lenders reserve the right to auction the gold if you are unable to repay the loan on time. According to regulations, an auction is allowed only after several reminders. The borrower, however, has the first right to participate in the auction of his gold. Here, it is essential to note that some lenders may be more aggressive in auctioning. Also, assess the lender’s capabilities in terms of the strength of his locker facility and other safety procedures followed at the branch.

Gold loans are a quick, easy and low-cost way to meet your immediate and emergency financing needs, but do ensure that you entrust your gold in safe hands after thorough due diligence.

Compare lenders objectively

• Compare lenders on criteria such as interest rate, processing fee, and prepayment fee

• Borrowers who have a poor credit score and hence find it difficult to get a personal loan may consider a gold loan 

• Interest rates can range from above 9 per cent to as high as 29 per cent

• Take this loan from a bank or NBFC, and not from unorganised-sector lenders 

• If you own hallmarked jewellery, you will be able to borrow more against it

The writer is founder and CEO, MyLoanCare.in