The representation of getting cash by mortgaging the gold is a known practice seen both in books and films. In such a traditional mode of availing cash, the gold jewellery or ornaments are kept as a mortgage with the lenders such as jeweller. This form of lending against gold is still practised today and a popular method of borrowing known as a loan against gold or gold loan.
What is a gold loan?
A gold loan is a secured loan, where banks and non-banking financial institutions provide finance against mortgage of gold jewelry and ornaments. As per RBI guidelines, you can get up to 90% of the value of the gold as a gold loan. The LTV( Loan to Value Ratio) of gold loans was only increased by the RBI to help borrowers to mitigate the effect of poor socio-economic conditions arising as a result of the lockdown period. Earlier, LTV for a gold loan was 75%.
Before understanding about different forms and methods of availing a gold loan, let’s know about the fundamental nature of a gold loan.
Features and Advantages of a gold loan:
- No restrictions on end-use of a gold loan: One of the primary advantages of a gold loan is that there are no restrictions on how you can use the money obtained through a gold loan. For instance, home loans can be used for construction, renovation etc. of a house, however, you can use a gold loan for any business or personal use like marriage, travel, medical expenses, business requirements etc.
- No requirements for CIBIL or Income: To approve your application for a gold loan, banks and non-banking financial institutions don’t ask you to submit any documents for income proof. A gold loan can be availed against minimum documentation of identity and address proof. Along with that, the financial institutions also don’t keep a check on your credit score before providing you finance against gold.
- Flexible tenure: Along with that, a gold loan also provides you with a flexible term to repay the loan. You can avail a gold loan from 1 day to 36 months based on your requirements. Thus, in case of any emergency, you can avail a gold loan for a shorter tenure, and similarly, you can also get finance for medium or long term mandate.
- Rate of Interest: The gold loan rates offered by banks and non-banking financial institutions are comparatively less than personal loan rates. Thus, you can easily avail a gold loan to fulfil your fund requirements.
Different methods of repayment of the gold loan: Along with flexible use and tenure of gold loan, you can also avail flexible methods of repayments for a gold loan.
- Bullet Repayment: Unlike regular EMI options, this option allows you to pay the gold loan amount at the end of the tenure. You can either pay the interest component as EMI, and the principal amount can be paid at the end of the tenure, or else you can pay the entire principal and interest component at the end of the tenure. This mode is usually preferred for short term tenure of a gold loan.
- Overdraft scheme against Gold Loan: The overdraft facility provided against the gold loan allows you to flexible repay the funds conveniently based on your requirements. The best part is you have to pay interest only on the used amount of the gold loan. Once, you have used the overdraft facility; you can renew it again.
- Regular EMI options: You can also avail the gold loans on the standard EMI options, where the principal amount and the interest on a gold loan are paid as EMI. This repayment mode is usually preferred for long tenures of a gold loan.
Conclusion: In the present times, when there is a shortage of funds and sources of income, a gold loan can be an ideal choice to tackle the liquidity crisis, both by lenders and borrowers.