Taking a loan against gold is not an alien concept, even for first-time investors. Up until 2017, around 1,250 tonnes of gold was pledged across the gold loan industry in India. Putting up gold as collateral to secure a loan has been an age-old practice. This holds true during the current coronavirus pandemic as well, in both urban and rural India.
Today, with stock markets underperforming, it has become difficult to liquidate assets without suffering a loss. Considering these challenging conditions and the reluctance of banks and non-banking financial companies (NBFCs) to give personal loans, holding cash has become more important than ever. In such a situation, your existing gold holdings can help you tackle emergency expenditures, settle medical bills, or jump-start your business.
What is loan against gold?
Loan against gold or ‘gold loan’ is the easiest and fastest way to secure a loan for your short-term requirements. A gold loan is a secured loan wherein you pledge your gold (bars, coins, or jewellery) to a lender on a temporary basis and in exchange you receive a sum of money equal to the value of your gold.
The gold loan is a percentage of the value of your pledged gold. The value of your gold is assessed basis its purity and weight. Once the value is ascertained, a loan-to-value (LTV) of 90% is applied and then given to you. The LTV has been increased from 75% to 90% by the Reserve Bank of India. However, this relaxation will come into effect only from 31 March 2021. Once the amount has been repaid, you will get back the exact amount of gold pledged in the same state.
But did you know that a loan can be taken against more than only your physical gold (bars or jewellery)?
What type of gold can be used as collateral?
- Gold jewellery (generally between 18 karat and 24 karat)
- Gold coins or gold bars
- Digital gold (must be exchanged for cash or jewellery first, against which a loan can be secured)
How to secure a loan against gold
Let’s take a look at the process to obtain a gold loan:
- Documentation:One of the best features of availing of a loan against gold is the minimal paperwork required.
- KYC (Know Your Customer) documents.
- Identity Proof: Any one of the following: driving licence, PAN card, Aadhaar card, Voter ID, passport
- Proof of residence
- Fulfilling eligibility criteria: You can get a gold loan even if you have a poor CIBIL score. In fact, if you can make timely monthly instalment payments, a loan against gold can help you improve your credit score. However, it's important to remember that payments past the due date or non-payment could eventually result in the auction of your collateral towards repaying the remaining interest and principal amount.
- Providing collateral: For purity evaluation, lenders will look at the percentage of gold in a given article. For instance, gold items ranging between 18 karat and 24 karat (such as gold coins and bars) are preferred as collateral. However, jewellery is accepted as well. Jewellery containing gemstones and other metals are checked and only the gold component is considered.
Avoid giving low-quality gold as collateral as you could be denied a loan, even if the other articles on offer are genuine. Once the checks are completed, the gold is accepted by the lending institution, which assumes the responsibility of storing it safely until the loan is repaid.
How is the loan amount calculated?
Let us assume you have 100 grams of 24 karat gold to offer as collateral and the prevailing market rate is Rs 5,000 per gram. The lender will loan you 90% of the total value of the gold.
100 grams x Rs 5,000 = Rs 5,00,000.
90% of Rs 5,00,000 is Rs. 4,50,000 which will become the amount loaned to you against 100 grams of gold given as collateral. This figure may be lower if processing charges are involved.
The price of gold changes on a daily basis. To check the current price of gold, simply visit theprice page.
Process duration: A gold loan is one of the fastest loans to be processed and disbursed. It generally takes only a few hours – or at most a couple of days – for the documentation to be processed and the loan to be sanctioned. The processing fee is either zero or about 1%–3% of the loan value.
Repayment options: Some lenders allow you to pay the principal amount at the end of the loan period, where you only have to pay the interest through the loan term. Other lenders will provide you with the option of equated monthly instalments (EMIs) comprising the interest rates and a part of the principal amount throughout the repayment tenure. If you wish to redeem your gold by repaying the loan amount before the tenure is over, some prepayment or early foreclosure charges may apply.
Related: How to recycle your unused gold
How to use gold ETFs to secure a loan
To secure a loan against gold, gold ETFs must first be redeemed as physical gold. This physical gold can then be pledged for up to 75%–80% of its value with a bank. The ETF units are processed and can be redeemed as physical gold in a day or two. Redeeming the funds would entail short- or long-term capital gains tax and exit costs, which are expenses related to selling the ETF units. KYC documents are required to complete formalities. The process for availing of a loan is the same as that for physical gold. The loan rates offered by ETF companies differ. Also, terms may change after you have availed of a loan against gold. Usually, this happens if the traded value of gold falls, upon which the lender may ask you to either prepay a nominal amount of the principal or offer more gold as collateral.
How to use digital gold to secure a loan
One of the most convenient features of investing in digital gold through online portals is that it can be easily exchanged for cash and jewellery. You can get doorstep delivery of the physical gold (minimum 1 gram) in tamper-proof packaging. This can then be used to secure a loan against gold. The process followed is the same as when physical gold is used as collateral.
Related : How to sell and redeem your digital gold
Things to remember before securing a loan against gold
Before deciding which lender to borrow from, you need to do the same due diligence as you would with other loans. You should compare interest rates, tenures, and loan amounts for loans against gold online before picking the option that best suits your requirements.
- Typically, you can take a loan of up to 90% of the value of gold that you put up as collateral. As we observed, the LTV was raised from 75% to 90% by the Reserve Bank of India. This relaxation will come into effect from 31 March 2021. In an effort to combat the impact of COVID-19, the increased LTV will be applicable on all loan against gold taken for non-agricultural purposes.
- Interest rates on the gold loan can range from 7.5% to more than 20% depending on the lender and the prevailing circ*mstances.
- EMI tenures can vary from a few months to up to five years.
Taking a loan against your gold doesn’t mean you are selling an asset. Once you repay the loan, the gold is returned to you. So, taking a gold loan is just a means to an end.
Related: 5 Scenarios in India where gold investments give fruitful returns
