Gold Loan: What Should You Know?
In India, gold is much more than a metal. People have several emotions attached to it. No wonder India is the largest importer of gold globally. If one were to look at imports of gold over the year, it has gone up consistently. The gold import India between the six months of April to September 2021 was valued at $24 billion, which is a massive jump of 252% compared to the corresponding figure of the last year.
According to an estimate by the Managing Director of the World Gold Council, Indian households have accumulated about 25,000 tons of gold over some time. This figure itself is an indicator of the love and craze Indians have for gold.
What is a Gold Loan?
Wearing gold not only makes people feel good about themselves, buying and investing in it gives a feeling of having arrived in life. In case of any financial hardships, one can take a secured loan against it and get over the crisis.
This loan against gold is called a gold loan. It allows borrowers to pledge their gold assets. Consumers can engage their 18-24 KT gold articles as collateral and get a secured loan against it up to a limit of 80% of the current market value and quality of gold.
How Does a Gold Loan Work?
The most important aspect of the gold loan process is the evaluation of pledged jewelry in terms of purity and weight. Another part of the gold loan process is to verify the ownership of the gold jewelry to avoid legal issues later on. Hence, verification of the borrower’s identity becomes very critical before sanctioning the loan.
Once the gold quality, ownership, and borrower’s identity are confirmed, the lender sets a credit limit against that. This limit is called ‘Loan to Value‘ (LTV). Like bank overdraft limit, LTV is sanctioned up to a certain percentage (usually 75%) of the market value of the pledged gold ornaments. Once this LTV is set, the customers can withdraw this amount whenever required.
For replaying the gold loan, the borrower has the freedom to make monthly payments or a lump sum payment at the time of maturity. On maturity, the customer can repay the outstanding and close the account or extend the tenure by pledging the jewelry once again at the current LTV. There is no limit on the number of times the gold can be pledged to get a loan. That means that the same gold can be rolled over for as long as needed.
Most banks levy some penalty in case of the borrower makes an early payment before the loan’s maturity. However, some banks and NBFCs allow the borrowers to make partial payments or early repayments without penalties.
Benefits of Gold Loan
As explained above, a gold loan works like an overdraft facility for retail customers. The gold loan allows retail customers to utilize their unused gold as an ‘earning member’ of the family. The various benefits of gold loan are:
Existing Asset Can Be Used: When borrowers take a gold loan, they can pledge the gold already in their possession. This gold can be in the form of jewelry, coins, biscuits, bars, or bullions. Borrowers can take a loan against their gold, in a discreet manner, without others getting to know about their financial situation. Once the situation normalizes and the borrower repays the principal amount and the gold loan interest, the gold is returned securely to the customer. The borrower has the freedom to take his gold back or use it again for the following loan. This way, any person can get a loan in an easy and hassle-free manner.
No Limit of Pledging the Gold: A gold article, once pledged, can be pledged again and again. There is no limit on the number of times a particular gold article can be pledged to get a loan against it. This gives the consumers the freedom and flexibility to use their assets the way they want.
Easy to Get: Unlike personal loans, getting a gold loan is easy. While disbursing a personal loan, the financial entity estimates the repaying ability of the customers, which is a subjective matter. But a gold loan is based on the actual market value of physical gold held by the consumers. Since the gold is in their possession, the financial entity need not worry about the recovery of the loan.
Freedom to Repay: Unlike other loans, the repayment of a gold loan can be done monthly (in the form of EMIs) or as a lump sum amount at the loan’s maturity. A consumer may also make a bullet payment, a one-time loan principal payment, and the gold loan interest and get the gold back. This feature holds much importance for households and small-business owners who have a sudden requirement or cash crunch for a short duration. In all other loans, the person has to start paying the EMIs from the next month of the loan approval.
Gold Loan Eligibility Criteria & Documents Required
Getting a loan against gold is one of the easiest and fastest ways to raise funds and meet your business or personal financial needs. Secured financing coupled with competitive gold loan interest rates and a simple loan process convenient for borrowers.
Eligibility Criteria for Gold Loan:
While taking a gold loan, the customer has to pledge their gold to the financial entity. The entity evaluates the gold in terms of quality and purity. Since the gold remains in their possession, there is no risk factor involved. Hence, the banks and NBFCs do not follow strict eligibility criteria for extending a gold loan. Even persons who do not have a good credit rating can avail of a gold loan.
Most banks and NBFCs have the following eligibility criteria for extending a gold loan:
- The person should be aged between 21 years to 70 years
- The person may be salaried/self-employed/businessman/trader/farmer, or anyone who holds gold in a legal manner
While the above are the eligibility criteria, the amount of loan that can be sanctioned depends on the LTV ratio.
Documents Required for Gold Loan :
A person needs to submit the following documents as proof of identity:
- PAN Card
- Aadhar Card
- Voter Identity Card
- Driving License
- Central or State Government issued photo identity card
- Photo Credit Card
- Defence Identity Card
Address Proof for Gold Loan :
A person needs to submit the following documents as proof of address:
- Aadhar Card
- Ration Card
- PAN Card
- Bank account statement
- Voter Identity Card
- Any utility bill (Electricity/Water/Landline, not older than three months)
- Letter from an authorised person
In addition to these KYC documents, the financial entity may ask the borrower to present an income proof letter and the necessary documents to show the ownership of the said gold.
How to Apply for a Gold Loan?
In India, to take a loan against gold, a consumer has three options:
Visit a Bank Branch for Evaluation of Gold
Consumers, who wish to pledge their gold for a loan, may visit a bank branch along with their gold (in the form of jewelry, coins, biscuits, or bars) and basic KYC documents for identity and address verification. At the bank, they can get an evaluation done for their gold. Basis the quantity and purity of gold, the bank offers an amount. If you feel right, you may hand over the gold and get the amount against it. The gold loan interest rate varies from 7.5% to 12%. However, this process requires carrying your gold to banks, which may have an element of risk involved.
Get the Gold Evaluated at Their Homes
Some banks and NBFCs even offer their prospective customers a doorstep gold evaluation service. When a customer opts for this service, the financial entity sends an executive to the customer’s home. The executive evaluates the gold then and there and quotes an amount. If the customer agrees, the bank executive takes the gold, which is credited to the customer’s account quickly. However, one word of caution here – while going for a doorstep evaluation of gold, one must verify the executive’s identity before finalizing the deal.
Go for a Digital Gold Loan
The third route is to go for a gold loan digitally. The customers may apply for a gold loan on the company website or mobile app in this method. There, the customers get to choose from various loan durations and interest rates gold loan, compare them, and choose the loan that works best for them. The financial institution conducts a video-based KYC verification with the help of their Aadhar card.
Once the customer enters his gold holdings in the app, an amount is quoted. If the customer is ok with the amount, they are issued a receipt containing all the pledged gold details, such as weight, karatage, pictures, and other details. The amount is credited to the customer’s account, and the financial entity takes the gold in their possession.
Top Banks – Gold Loan Interest Rate
|Name of the Bank||Interest Rate||Loan Amount|
|ICICI Gold Loan||9% p.a. – 19.76% p.a.||Rs. 10,000 to Rs. 1 crore|
|Axis Bank Gold Loan||13.50% p.a.to 16.95% p.a.||Rs. 25,001 to Rs. 25 lakh|
|HDFC Gold Loan||11% p.a. to 16% p.a.||Rs. 10,000 onwards|
|Canara Bank Gold Loan||7.35% p.a.||Rs. 5,000 to Rs. 35 lakh|
|Muthoot Gold Loan||12% p.a. to 26% p.a.||Rs. 1,500 onwards|
|SBI Gold Loan||7.00% p.a. onwards||Rs. 20,000 to Rs. 50 lakh|
|Kotak Mahindra Gold Loan||10.00% p.a. – 17.00% p.a.||Rs. 20,000 to Rs. 1.5 crore|
|IndusInd Bank Gold Loan||11.50% p.a. – 16.00% p.a.||Up to Rs. 10 lakh|
|Manappuram Gold Loan||Up to 29%||As per the requirement of the scheme|
|Bank of Maharashtra Gold Loan||7.10% p.a.||Up to Rs. 20 lakh|
|PNB Gold Loan||7.70% p.a. to 8.75% p.a.||Rs. 25,000 to Rs. 10 lakh|
|Bank of Baroda Gold Loan||9.00% p.a. – 9.15% p.a.||Up to Rs. 25 lakh|
*Repayment tenure has been taken as six months, taking the purity of the gold as 22k.
Things to Consider When Taking a Gold Loan
If you plan to take a gold loan, you must consider a few things before pledging your hard-earned gold assets.
- Make sure the lender is credible. Avoid taking gold loans from unorganised players as it may result in fraud. It’s always better to trust certified financial institutions.
- Look at the gold loan rates and repayment options. Decide whether you want to go for EMIs or bullet payment. Also, enquire if the financial entity charges a penalty in case of pre-payment or lump sum payment.
- Decide whether you want to go ahead with a bank or an NBFC. Typically NBFCs have a simpler loan process, but their interest rates are higher compared to banks.
- The valuation of gold determines the loan amount. Hence, getting a correct evaluation is critical because this will determine the LTV and the final amount of loan sanctioned. For availing of the gold loan, its purity must be anything between 18KT to 24KT. Jewellery having other metals, precious or semi-precious stones, command a lower value than the pure gold of the same weight.
Frequently Asked Questions about Gold Loan
Q1: Can anyone take a gold loan?
Yes, any person between the age of 21 to 70 years, whether salaried, self-employed, businessman, trader or even a farmer, can avail of a gold loan.
Q2: Is it safe to take a gold loan?
Taking a gold loan is entirely safe, provided taken from a certified bank or NBFC.
Q3: Does taking a gold loan improve my CIBIL?
Taking a gold loan does not improve your credit rating. However, timely repayment does improve your CIBIL score.
Q4: Who is eligible for a gold loan?
Any person between the ages of 21 to 70 years is eligible for a gold loan.
Q5: Is a gold loan better than a personal loan?
A gold loan is simple and does not require too much documentation. Also, since the gold loan interest rate is lower than personal loan interest rates, taking a gold loan is a better idea compared to taking a personal loan.
Q6: Which is better, a gold loan or a personal loan?
Given the easy documentation and lower interest rates, a gold loan is better than a personal loan.
Q7: What if I don’t pay a gold loan?
If you do not pay your gold loan in time, the financial entity may report your case to the credit bureaus. That will hurt your credit rating and your future ability to take loans.
Q8: Can I avail loan on digital gold?
Usually, a gold loan is offered against physical gold only. However, some NBFCs have recently started offering loans against digital gold as well.