Summary:
Gold loans can be your entryway to easy, swift, trouble-free and cost-effective loaning, provided your approach it with some forethought and prudence.
Main Text:
Indians have been hooked to gold since antiquity and the passion seems to last. The gold is an asset and often a valuable inheritance passed from one generation to the other. Given the emotional value attached to gold, selling it is not an option. But pledging it for a loan is.
The loan against gold helps you fund any urgent requirement easily and quickly. Plus, you regain the rights on the pledged gold upon the expiry of the loan term. Though the gold loan is perhaps the best loaning option currently available, there’re a few layers to it. You need expert advice on how to approach gold-based borrowing for the better end of the deal. Here’s it.
Know your needs:
The thumb rule for smart borrowing is to know your needs beforehand. Your needs will decide the two key components of loaning – how much to borrow and how to repay. Imagine this. You need INR 10 lakhs to pay for your child’s higher education. Now, anything less than the requirement might fail to solve your purpose. Likewise, anything above is a sheer splurge, as you’ll end up with heavy EMIs, drawn-out repayment schedules and high-interest outgo. Plus, avoid loaning for discretionary spending. It has to be taken for something really important.
Borrow responsibly:
The loan (principal plus interest) has to be paid off in a pre-agreed schedule. Any delays attract penalties. Worst still, non-payments may force the lender to put your pledged gold on the market. When that happens, you lose your cherished family inheritance. That calls for ascertaining your repayment capacity before applying for the gold loan. The EMIs should be ideally 30 to 40% of your total monthly if you have no other loans to repay.
Research the market:
Banks and NBFCs are eager to cash in on the gold loan boom that India is experiencing lately. They are ready to roll out cash for gold to anyone in need. Some offer low-interest rates while others guarantee quick, hassle-free processing. Now, your task is cut out, research the market well and choose the lender prudently. NBFCs have an edge over the banks. They are more responsive to your needs, tailoring loans to your specifications. NBFCs assure quick disbursals, more product variations, easy repayment schedules, and don’t levy pre-payment penalty.
Compare interest rates:
The gold loan is granted on the guarantee of the gold. As the lender’s risk is covered, you can rest assured of competitive interest rates. That said, interest rates vary from lender to lender. Some might charge as low as 13%, while others keep it to 16% per annum. Comparing interest rates offered by different lenders is essential to restrict your overall cost of borrowing. Besides interest rates, other charges, such as processing fees, valuation fees, prepayment charges, and other penalties should be factored in. Here too, NBFCs steal a march over banks.
Determine the LTV
Loan to Value (LTV) is the amount the pledged gold will fetch you. In the loan against gold, the LTV is typically up to 75% of the pledged gold’s total market value. If your gold is worth INR 1 lakh, the LTV will be INR 75000 at best. The LTV is determined by factors like purity and form of gold. The 22 karat gold fetches better loam amount than 20 or 18 karats. Likewise, bank-issued gold coins and gold bars attract higher LTV vis-à-vis the gold jewelry. If the gold falls short to generate the desired funds, you can pledge an extra asset to boost the LTV.
Shorter versus longer tenors:
The loan against gold works best when raising funds for the short term. Specifications may vary, but lenders usually offer tenors ranging from one month to 36 months. In longer tenors, the EMIs are easy but interest outgo is high. Contrarily, shorter tenors involve high EMIs and low-interest payouts. It’s up to you to decide what tenor suits your requirements.
Learn about the repayment structure:
Just like interest rates and LTV, the repayment structures are lender-specific. Some lenders mandate repayments in monthly installments. Conversely, some lenders allow you to pay the interest component monthly and principal at the end of the loan term. The repayment structure should be clear to you before taking cash for gold.