The gold loans are among the oldest loans and have several benefits like instant cash to easy retrieval.
The gold kept as security with the lender. Once you have repaid the loan along with interest, you can claim the gold. if you fail to do so, you may end up losing the precious gold item.
You can pledge your gold jewels, gold bars and gold coins. Depending on the purity of pledged gold, the loan amount gets sanctioned. Gold bars and gold coins have a higher purity than gold ornaments. In case of ornaments, only the weight of gold is considered. Embellishments like stones and gems are not considered.
However, you must cross-check a few things before going for a gold loan. These are:
1. Rate of interest
Although gold loans are cheaper than personal loans, the interest rates vary across institutions. Depending on where you avail the loan, cross-check interest rates.
As gold loans are offered by banks, NBFCs (Non-banking financial companies), lenders, gold jewelers and so on, you must ensure you get the best quote before giving away the precious metal.
2. Loan amount
In the case of gold loans, no lender will offer 100%. The loan amount ranges from 60% of the gold value up to 75%. This percentage is decided based on:
- The purity of gold
- The prevailing rate of gold
- Lending institution’s policy
Gold loan amount is calculated in two ways. One way is to take an average of the last two week’s gold prices; the other way is to consider the present day gold price based on weight and purity of the gold.
3. Tenure of gold loan
Gold loans are short-term loans ranging from 12 to 14 months. You must ensure the time-frame is within your limits or you may end up losing your gold.
4. Repayment of gold loan
A critical aspect of gold loan is the repayment process. As gold loan is a secured loan, the gold you keep is the security. The lender is at no risk as there are no chances of a default. Going for a gold loan is an attractive option in terms of instant money at lower interest rates. However, you must go for a gold loan only if you are sure to get back the desired amount within the stipulated time frame.
5. Hidden costs and fee
While this totally depends on your lender, several banks and NBFC’s charge a nominal percentage which is 1% of the loan amount as processing fees. You can check with your loan provider before opting for the gold loan on the terms and conditions of the agreement before signing the contract.