PremiumNEW DELHI: Gold loans with overdraft are typical "use-as-you-need" credit facilities. When you pledge gold, the lender will put money in your bank account. But will only charge interest on the portion that you withdraw, not the entire amount.
"They are a form of revolving credit that you can avail against gold and function more or less like a credit card. The interest rates and margin amount on overdraft loans are comparable with gold loans. However, they offer much more flexibility than a gold loan in which a borrower pays equated monthly instalment (EMI)," said Adhil Shetty, CEO, Bankbazaar.com
When you deposit your gold with a lender as collateral for an overdraft, the lender opens a specific overdraft account. The account is credited with the loan. Depending on the lender, the overdraft account could be a new account, or the bank can link it to your existing savings bank account.
"Some lenders may offer all the features and benefits associated with a current account to the overdraft account. You can withdraw amounts from the overdraft account as and when required. The lender could even issue a debit card for the overdraft account," said Shetty.
He added the other way to access the loan amount is using a cheque issued for the overdraft account. Some lenders may also allow you to shop online or make payment via an overdraft account.
"The EMI-based gold loan offers you a lump sum. Overdraft loan, however, takes a different approach. For one, it is reusable. For instance, if a lender approves you for an overdraft gold loan for a particular amount, you can access any portion of the credit line at any time," said Shettty.
If you have, say, an overdraft of ₹3 lakh for three years. Of this, you can consume a part of it, say, ₹50,000 or the entire amount any time in part or whole through for the tenure. The lender will charge you interest only on the portion of money you have used.
Overdraft loans are a good idea when you are worried about future expenses and would like to prepare yourself against and sudden need for funds.
They are helpful when you need to borrow small amounts but would like to keep the options at hand if there's a bigger than anticipated need for finances. A gold loan with an EMI option, on the other hand, is best suited for making planned expenses.
(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts)
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