What is Gold Loan?

Kid, if you are planning to pawn off your mother's jewellery for some liquid funds, bad idea! Flying chappal is not a cool thing to receive. 

A common victim of the “limited resources for unlimited needs” problem is our income. We often want or need things, but our pockets would never allow these purchases. While the solution to this problem seems very simple, increase one’s income, it is not one that is easily attained.

This is where external financing or loans to be specific come into play. Loans provide a person’s finances with an infusion of funds to help them undertake purchases even if their wealth or income might not allow such a purchase.

Loans are, however, limited in what purpose they can be used for. These limitations are usually implemented by the Bank or NBFC that lends this money.

Personal loans are a lot more flexible and can be taken to fund any of the aforementioned reasons and more. But personal loans can be very costly with relatively shorter repayment periods because they are unsecured.

But what if there was another flexible loan, that wasn’t limited in its use cases and was a lot more lenient compared to personal loans? What’s more is that an important part of the loan is probably on your person, in your house or in a safe somewhere. So let’s read a bit about this funding option a little.

Gold Loans Explained

Gold loans or loans against gold are loans that can be taken by individuals by using gold; in the form of jewellery or ornaments or specially minted coins sold by banks, as security for said loan. Gold loans can be used to fund any of the borrower’s financial needs, except buying more gold/jewellery, a limitation to deter the use of these loans for the speculative purchase of gold (Yes I know, not as flexible as personal loans, but by just one point! Utna chalta hai). Lenders also do not accept gold bars or bullions as securities for these loans.

For an article of jewellery to be accepted as security, however, some standards need to be met in terms of quality and weight of the gold in the jewellery submitted as the collateral. The following are the standards that your jewellery will have to meet to let you secure a gold loan:

• Weight: The jewellery used as security must have at least 10 grams of gold used in it. Gold is the most malleable metal, which is why on its own, the metal alone cannot stand the wear and tear of everyday use. To prevent jewellery from warping or losing its shape, gold is often alloyed with other metals to sustain its shape.

So, for the purpose of gold loans, the total amount of gold metal alone used in the jewellery must be equal to or more than 10 grams. The weight of the alloy used in the jewellery does not matter.

• Quality: We’ve all heard the phrase 24 Karat Gold, but have you ever wondered what that phrase means? Well yes, it is a representation of the purity of the gold present in anything made out of the shiny metal. But why is 24 the highest quality?

The answer is that the word Karat is used to describe 1/24th of the weight of the gold. So the Karatage is the amount of gold present in, say a necklace. If the necklace is said to be of 22 Karats, this would mean that if the weight of the necklace is divided into 24 equal parts, 22 parts would be pure gold and the remaining 2 parts would be one or more metals, added for any number of purposes.

For a borrower to be able to acquire the full loan amount, the jewellery used as security must be 18 karats or more. If the purity is less than 18 karat, the loan amount will go down accordingly.

• Gemstones: Gold jewellery commonly has gemstones attached to it. When it comes to gold loans, only the value of the gold in the jewellery is taken into consideration. Any and all gemstones attached to the jewellery do not affect the value of the loan available to the borrower.

One thing to remember when acquiring a gold loan is that the loan is given against the gold used in the jewellery, not against the value of the jewellery itself.

More about Gold Loans

Now that you know about the nature of the metal, here are some of the aspects of the loan you get against it.

• Documents required: Like any other loan, gold loans also require the basic identity and address proof. Aadhar card, PAN card, Voter ID, etc. can serve the ID proof requirement while utility bills, rent agreement, passport, driving license can serve as proof of address.

Unlike many other loans, gold loans do not need proof of income for approval of the borrowing.

Some lender banks or NBFCs may require jewellery certificates as proof of ownership of the jewellery being used as security.

• Loan-To-Value (LTV): Loan to value is a ratio that represents the percentage of the total value of the gold in the jewellery that will be sanctioned as the loan. Lenders do not provide a loan equal to the full value of the jewellery so that the difference in value versus the loan amount can help the lender not lose money in case the borrower defaults in repayment.

Previously the LTV on gold loans was 75%, which was raised to 90% on 2020 by the order of RBI. This means that if jewellery worth ₹100 is used as security for a loan, the lending bank, NBFC will sanction a loan worth upto ₹90. In case the borrower defaults in repaying the loan, the bank will sell the jewellery and the ₹10 difference will act as a compensation for the loss of interest income for the bank.

• Duration of Sanction: Gold loans are fairly document light and require less time than other loans. Banks can take upto 3-4 business days in sanctioning the loan, while NBFCs can take as little as just an hour to complete the loan proceedings.

The difference in durations is due to banks having a wider service offering than NBFCs which allows the latter to dedicate more time and personnel to making the procedure faster.

• Foreclosure: Foreclosure means the premature repayment of loans with a lump-sum amount of money. Borrowers can repay the loan amount before the expiry of the loan tenure to release their jewellery. A foreclosure fee, which is a percentage of the loan amount is charged for the same by some lenders.

Golden Closing Thoughts

Gold loans can allow its borrowers to avail a greater pool of funds than they own to fulfil their financial needs. They allow the same flexibility of use like personal loans but charge comparatively lower interest rates. This makes gold loans somewhat more feasible than personal loans due to the affordability of the former that result from gold loans being secured.

As far as sources of loans are concerned, banks and NBFCs are the major providers of gold loans. Entities like jewellers also provide loans, but it is recommended to avoid these as these entities are unregulated. To learn which of the providers suits you better, read another article on the gold loan industry.

What else would you like to know about gold loans, loans in general or other financial topics. Let us know in the comments section below or write to us on support@finology.in

See you on the next blog.