What Is the meaning of gold loan and how does it work?

Gold loans – Important things to know

Did you know that you could use your gold to avail a loan in less than a day? Read on to know more.

1. What are gold loans?

   Gold loans are secured loans where gold jewellery is used as collateral. You pledge your gold jewellery with the lender and get a loan. The loan amount is usually a percentage of the gold’s value. You can repay the loan through monthly instalments. After the repayment, you get back your gold jewellery. Nationalised banks, private banks, and other financial institutions offer these loans at affordable interest rates. Usually, borrowers use this loan to meet a sudden financial goal, such as a marriage or a child's education. Instead of selling the gold, many people prefer to opt for a loan.

2. How do gold loans work?

   You take your gold jewellery to a lender and ask to pledge it for a loan. The lender evaluates the gold and sanctions a loan after verifying the documents. Some gold loan lenders may also provide home assessment of your gold jewellery. The process is quick and usually takes a day.

3. What documents are required for a gold loan?

   For a gold loan, you need to submit your identity proof such as a driver's license, PAN, passport or Aadhaar card If you do not have a PAN card, you will be asked to submit Form 60. For address proof, you need to submit an electricity bill, ration card or telephone bill. You need to also submit a signature proof such as passport copy, driver's license or any other document.
   In addition to that, you also have to provide a passport size photograph. Some lenders also ask for your income proof.

4. What are the interest rates for gold loans?

   As gold loans are secured loans, the interest rates are comparatively lower than unsecured loans like personal loans. Non-banking Financial Companies (NBFCs) can charge higher rates than banks. So, it is advisable to compare various interest rates before getting a gold loan. This can be higher than a personal loan, which has an interest rate of 12.75% or more , though this varies between different providers.

5. What are the fees and other charges involved while applying for a gold loan?

   When you apply for a gold loan, lenders ask for a processing fee of up to 1% of the loan amount. You may also be charged for documentation. There may be fees applicable for valuation of the gold. Lenders may also charge renewal fees based on the loan amount, and stamp duty as per state laws. You will also need to pay a penalty charge in case of late payments. Your lender may also charge you service tax (or GST) and prepayment/foreclosure fees based on when you decide to close the loan. The actual amount of charges varies from lender to lender. So, don’t forget to compare these too.

6. Who is eligible for a gold loan?

   Anyone who owns gold jewellery can get a gold loan. This can be salaried professionals or even housewives and farmers.

7. What is the tenure of a gold loan?

   Gold loan tenures are usually short and range from to 3-12 months . However, some lenders may offer you a longer tenure. Other lenders allow you to renew your loan and extend the tenure

   Since the tenures are short, you must be sure of being able to pay the loan back on time. You may lose the pledged gold if you fail to repay it within the tenure or the lender may auction it off to recover the loan amount.

8. How do lenders determine the gold loan amount?

   Lenders evaluate the gold purity and their weight before confirming the loan amount. Based on the gold's purity and its weight, the gold appraiser determines the market value. The lender offers to give a loan with a value up to 75% of the market value. This is called the ‘Loan to value ratio’ (LTV). For instance, if your gold's value is Rs 1 lakh, the gold loan amount granted cannot be higher than Rs. 75,000. However, some could get a lower loan amount too. This is because lenders often consider the borrower’s repayment capacity too. However, unlike personal loans, lenders do not take the credit score into consideration.

9. How is the pledged gold stored and treated?

   The way the gold jewellery is stored may vary from lender to lender, but great care is taken to store the gold jewellery properly. After the loan is granted and disbursed, the gold is kept under tight security. Lenders use electronic vaults with motion detectors and CCTVs for security purposes. Some lenders even insure the gold pledged by you. This protects it against theft. In case of a robbery, you still get an amount equivalent to the gold’s market value back.

10. How to repay a gold loan?

    Depending on your lender, you may have the option of flexible repayment. Most lenders offer you the choice of paying only the interest component every month. In such cases, the principal amount is paid at the end of the loan tenure. You can also choose to pay EMIs to pay off the gold loan.

Essential Dos and Don'ts while applying for a gold loan

To sum it up about gold loans​:

Usually, gold loans are comparatively cheaper than personal loans. If you have an immediate financial need, a gold loan can help you, as the process is quicker than most loans.

Frequently Asked Questions

1. What is the calculation process for the market value of my gold jewellery/ornaments?
   Gold purity is first determined by the appraiser. Then, based on the per gram market rate of gold on the day of the loan application, the market value of the gold is calculated. In case of jewellery/ornaments, only the gold is used to calculate the value. Any other metal, stones and gems are not considered for the valuation. Check the price page on My Gold Guide for daily market updates.
2. For a gold loan, what collateral/security do I need to provide?
   You can pledge any gold jewellery/ornament with a purity of at least 18 karats as security for your gold loan.
3. Can my loan account be foreclosed / can my loan account be closed before its tenure ends? In this case, what are the charges involved?
   You can foreclose your gold loan. The foreclosure fee will depend on how long after the loan allotment you are foreclosing your loan. The actual charges vary from lender to lender.
4. Can a part payment be made of my loan amount?
   Most lenders allow you to make part payment to pay back a part of the loan amount. A part payment also reduces the interest charged, as it is calculated only on the remaining loan amount.
5. Can I get back my gold if the gold loan is foreclosed?
   Most lenders would also allow you to take back part of the pledged gold after part payment. The amount of gold released is determined such that the loan to value ratio at the start of the loan tenure is maintained.
6. Can I pay my loan amount or interest anywhere across India?
   Most gold loan accounts in India provide online facility for loan repayment. You would be able to access these anywhere in India.
7. What is the auction process in the event, customer fails to settle the loan Account or instalments/repayment interest/Principal Amount/any other amount, charges ("the total Outstanding"), post the conclusion of Loan tenure?
   The process for the auction varies according to the lender. Typically, a ten-day notice is given to the customer to pay the outstanding amount. In case of default, the lender would typically advertise about the auction in two newspapers at least. If the pledged jewellery/ornaments are sold at a value less than the outstanding amount, the customer has to pay the remaining amount.