Gold loan: When to go for it and when not to

Gold loans or loan against your family silver is fast catching up. Gold loan is a loan taken by pledging the gold jewellery. Simply, what is means is that if you are in need of cash, you might be able to borrow against the gold lying at your home, and such a loan will cost you far less compared with a personal loan.

Gold loan has been a practice prevalent in India for many decades now. Companies like Muthoot Finance started their gold loan business as early as in the 1930s. Public sector banks too have been giving loans against gold, mostly for agricultural purposes, for many years now. Now, even private sector banks have joined the bandwagon, seeing the vast potential in this relatively risk-free business.

According to some estimates, the organised gold loan business in India grew at a compounded annual growth rate (CAGR) of 40 per cent between 2002 and 2010. At the same time, the gold stock in India saw a 22 per cent CAGR between 2002 and 2010, according to a report by Icra Management Consulting Services.

So, what are gold loans? If you need a loan and can repaying the loan on time, you can unlock the value of gold by taking a loan against it. The lender gives you a loan against your ornaments of up to 80 per cent based on purity.

You can get a gold loan from your bank or a non-banking company. Bank generally requires a lote of documentation, but for non-banking financial company (NBFC), such as Muthoot or Mannupuram, the process can be as quick. However, these lenders charge a higher rate of interest than banks.

In gold loans, you borrow against the security of gold that you give to the lender. You can use the loan for any purpose, as long as it is not for any illegal activity or for speculation. Banks charge around 12.5 per cent interest and a processing fee. NBFCs have 30-60-90 day and other schemes, where the rates of interest can be approximately 2 per cent per month. Loans start from Rs 25,000 to Rs 75 lakh. Banks have terms that run from three to 12 months, and you can prepay at any time. You can choose the term at NBFCs.

Gold loans can be a quick way to get a loan against ornaments. This is helpful if you have no credit history. But don’t take such a loan to buy a new fashion accessory or cell phone. Personal loans are an alternative but more expensive and have prepayment restrictions.

Gold prices are at an all-time high and are expected to go higher. However, you face no risk if there is a price movement during the time your loan is outstanding. Most lenders come under strict regulatory supervision from the RBI. So, it’s safe to with a lender that has been around for a while.