Gold loans can help overcome a temporary cash flow crisis. You can get a loan quickly with minimal paperwork. The lender does not check the credit scores or assess the borrower’s repayment capacity when making a loan against gold.
Such loans can help small business owners overcome temporary cash flow problems, or a person who needs money urgently, or if a person is considering consolidating debt.
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You can get a gold loan from a bank and a non-bank financial corporation (NBFC). Within the NBFC, some companies focus on gold lending activities, such as Manappuram Finance and Muthoot Finance. They are the fastest to disburse the loan.
Before taking out a loan for gold, here are a few things you should keep in mind.
Banks vs. NBFC
There is one essential difference between banks and NBFCs. The former offers better interest rates and NBFCs can lend higher amounts. How do they do? They value your gold at a higher price than the banks.
Suppose a borrower has a 20 gram gold necklace that he wants to pledge. The banks and the NBFC both offer the borrower 75% of the value of the gold. If a bank values your gold at, say, ₹46,500 for 10 grams, the NBFC could value it higher.
There are also other small differences. For example, the NBFC which mainly lends against gold may offer loans more quickly because it values the metal internally. Not all bank branches may have this facility, and they can hire an expert for this.
Lenders do not accept gold bars
The minimum purity accepted by lenders is 18 carats. Most lenders may not consider gold to be below this purity. Many lenders also do not lend against gold bars. However, you can pawn jewelry and gold coins. Keep in mind that the lender will not take into account any diamonds or stones that are part of the jewelry when appraising it. They will only lend against gold.
In the case of coins, they may require a higher purity and have weight restrictions. Many do not accept coins over 50 grams.
Most lenders do not have a prepayment charge. Even if a few take it, they represent about 1% of the outstanding balance. There might also be an assessment fee and a processing fee.
There are several repayment options to choose from, depending on expected cash flow. You can repay in Equivalent Monthly Installments (EMI), or you can only pay interest for the life of the loan and the one-time principal payment at the end.
Some lenders, especially NBFCs, might deduct the interest portion before disbursing the loan amount. Say that a borrower is sanctioned ₹50,000 loan and interest charges are ₹5,500. The lender will only pay ₹44,500.
If you are unable to repay the loan on time, the lenders have the right to sell your gold. Additionally, if the price of gold drops, the lender may ask you to pledge additional gold. The lender would like to maintain the loan-to-value ratio all the time; that is, the value of the gold they hold should be greater than the money they paid.
Gold loans are convenient, but only opt for them when you are faced with a temporary cash flow problem. Don’t use them to finance a big expense, like buying a house. Keep the term as short as possible.
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