Layoffs and pay-cuts have become quite common during the Covid-19 crisis. At this juncture, if you are facing a cash crunch and are looking for quick funds, obtaining a loan against gold may not be a bad idea.

Gold loans are among the quickest forms of obtaining funds from financial institutions. The sanctioned loan amount depends on the value of the gold pledged; the value of gold has increased from ₹3,500 per gram in the beginning of this year to ₹4,280 per gram now, as per the Association of Gold Loan Companies.

The Reserve Bank of India (RBI) allows banks and non-banking financial companies (NBFCs) to give loans up to 75 per cent of the value of the gold pledged; this is called loan-to-value (LTV). Generally, the average price of gold for the last 30 days is used to estimate the value of your gold by lenders.

Gold loans have a short-term tenure, generally one year to three years.

Procedural ease

With gold articles as collateral, financial institutions classify gold loans as ‘secured’. These loans are generally sanctioned and disbursed faster than many other loans.

Most banks and NBFCs disburse gold loans once the purity of the metal is checked.

The documentation, too, is simple. Generally, the personal identity proof and the address proof of the borrower are the primary documents required. Income documents or credit scores do not weigh much in the process of sanctioning and disbursing of the gold loans.

George Alexander Muthoot, MD, Muthoot Finance, says: “Customers are expected to come to our branch just with their Aadhaar card or any other valid identification document, along with the gold jewellery. We collect their phone number and take a photograph. Once the gold purity is checked, the loan amount is approved.”

Thus, those having no formal credit history and income documents too can obtain gold loans. Note that while credit history may not play a key role in getting a gold loan sanctioned, non-repayment or delay in repayment of such loans by the due date would adversely impact the credit score of the borrower, which, in turn, affects future borrowing prospects. This is in addition to the penal charges that the lender may charge for delaying the repayment. Further, the lender has the right to auction the gold and recover the dues in case of non-repayment.

Besides procedural ease, gold loans score higher on cost, too. With the RBI slashing its repo rate from 2019, many banks have reduced interest rates on gold loans by 100-250 basis points. For instance, SBI has reduced the interest on its gold loans to 7-7.5 per cent per annum from about 9.65 per cent a year ago. Interest rates on gold loans offered by NBFCs are relatively higher.

Gold loans are also offered at lower interest rates compared to personal loans. For instance, SBI’s gold loan is much cheaper than its personal loan, which is being currently offered at about 11 per cent per annum.

Further, the processing fee for gold loans would be nil or marginal. Also, most financial institutions do not charge a fee in the event of foreclosure of the loans since these are short-duration loans. Almost all lenders also allow the renewal of the loan by re-pledging the gold. Once the gold loan is closed, another loan account can be opened immediately by re-pledging the gold.

Flexible repayment

Gold loans offer flexible repayment options. Apart from EMIs (equated monthly instalments), bullet repayment options too are available. In the latter, interest payments have to be made periodically and the principal amount due can be repaid at the end of the tenure.

Banks could also offer overdraft (OD) facility on gold loans. In this case, the lender opens an OD account in your name to which the loan value granted is credited. The amount could be used as and when required, up to the allowed credit limit. Interest will be charged only on the amount used. A few banks also offer debit cards to withdraw the money from such accounts.

What if gold prices fall?

If gold prices fall steeply, the value of the gold kept as collateral could come down significantly. In such cases, the lender may ask the borrower to repay an amount such that requisite margins are maintained.

However, as gold loans are short-term loans, drastic movement in prices within the loan tenure could be unlikely.

Positives

* Increase in loan amount eligibility

* Less documentation

* Quick disbursal