With gold prices having seen a sharp rise in recent months, borrowing loan against gold jewellery could be an option if you’re in need of money to fulfil your financial needs. Loan against gold jewellery/ornaments is one of few loan products available that you could get with ease and has almost zero rate of default. This is the biggest factor that makes gold loan different from other loans such as personal loan. Further, unlike other loans, gold loan doesn’t require a guarantor or introducer and there is no need for a bank account.
People prefer gold loans mostly to meet their immediate financial needs such as for medical expenses or weddings. You can borrow money ranging from Rs 25,000 to Rs 20 lakh, although the minimum and the maximum amount varies from bank to bank. For NBFCs the limit is wider i.e. they could sanction loan from as little as Rs 1000 to Rs 1 crore. The amount of loan to be disbursed is dependent on the borrower’s profile such as his requirement, valuation of gold and the borrower’s repayment capacity. Once you fulfil all the necessary documentation and furnish details, the loan can be disbursed to you within hours.
Eligibility
The documentation is also simple. Generally, banks/NBFCs ask for documents such as the borrower’s identity proof (it could be passport copy/ voters ID card/PAN card or Form 60/Aadhaar card), address proof (passport/electricity bill/telephone bill/ Aadhaar card) and signature proof (passport/ PAN card/banker’s verification/ cheque), and passport sized photographs.
Gold loan is given agricultural/business/personal purposes and the loan amount cannot be used for purchase of gold jewellery/coins, land etc. The loan processing charges varies from 0% to 0.5% depending on whether there are foreclosure charges or not. Banks/NBFCs giving gold loans also charge valuation fee that could be either fixed such as Rs 250 for loan upto Rs 1.5 lakh and Rs 500 for loan above Rs 1.5 lakh, or it could be pro rate depending on the loan amount, such as 0.25%.
LTV & Valuation
The LTV (loan to value) ratio for loans against gold jewellery is, as per the latest RBI guidelines this year, 75%. This means loans sanctioned by banks should not exceed 75% of the value of gold ornaments and jewellery. Prior to this, the limit was 60%.
In September last year, in a guideline the RBI laid down standardization rules for valuing gold in arriving at LTV ratio. The central bank in its notification said that there is no standard method for arriving at the value of gold accepted as collateral and valuation is arbitrary and opaque.
“In order to standardize the valuation and make it more transparent to the borrower, it has been decided that gold jewellery accepted as collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by The Bombay Bullion Association Ltd. (BBA)” the RBI said.
Further, as per the guideline, while accepting the gold as collateral, the NBFC should give in writing to the borrower, on their letter head giving the purity (in terms of carats) and weight of the gold. If the gold is of purity less than 22 carats, the NBFC should translate the collateral into 22 carat and state the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.
Although the interest rate on gold loan varies according to the customer’s profile, it ranges from 12% to 20%. The tenure of the loan varies from 6 months to two years. Another point to note is that many banks provide loan only against gold jewellery/ornaments and not against gold coins. Some banks though give loan against 24-carat gold coins issued by banks only. In this case, the weight of the gold coin should not be more than 50 grams.
Bank Or NBFCs
Now when you have decided to go for gold loan, you must know the pros and cons of borrowing from a bank or an NBFC. The interest rates charged by NBFCs on gold loan are higher than that imposed by banks. Generally, the difference is of 200-300 bps. You should also compare other charges such as processing charges, pre-payment charges, late payment penalty and disbursal time.