Thinking of applying for gold loan? Here's how you can avail it

RBI raising the loan-to-value ratio to 90% from the current 75% till 31 March 2021 has made gold loans an even more attractive borrowing tool for households and small businesses; Here’s a complete guide on how they can avail a gold loan and what are the advantages.

Hyderabad: The Reserve Bank of India (RBI) on Thursday added some sheen to gold loans when it announced an increase in permissible loan-to-value (LTV) ratio to 90% from the current 75% in order to provide relief to households, entrepreneurs and small businesses that are currently reeling under the impact of the coronavirus-induced slowdown.

LTV ratio basically refers to the amount of loan an individual can get against the value of gold kept as a collateral. So, for instance, an individual who pledges gold worth Rs 1 lakh with banks or financial institutions can now get up to Rs 90,000 as loan compared with Rs 75,000 earlier.

However, the relaxation in LTV ratio is not permanent and will only be applicable on loans availed till 31 March 2021. So, in case you are thinking of applying for a gold loan, here’s a complete guide:

What is a gold loan?

A gold loan is essentially a secured loan in which a customer pledges his/her gold ornaments as collateral with a bank or a gold finance company and can get easy financing at attractive interest rates without much paper work. Once the loan repaid, the borrower gets his/her gold back.

Who is eligible to apply for a gold loan?

Any individual above 18 years of age with possession of physical gold and ornaments, along with a valid identity proof, can apply for a gold loan.

How much amount can be borrowed by a gold loan?

Gold loans can be given for an amount starting Rs 10,000 and going till Rs 1.5 crore depending on various banks and gold mortgage firms. The amount of loan sanctioned depends on its market value at the time of pledging.

The lender will check the purity and weight of gold to determine its current value. Gold loan customers should remember that purity of the gold being pledged should be over 18 Karat. If taking a loan against jewellery, the value and weight of gems and stones will be deducted and only the gold part will be valued.

What is the usual tenor of a gold loan?

Gold loans are usually short-term loans with tenor ranging from 3 months to 5 years depending upon the lender.

What are the interest rates?

The interest rate on gold loans moves in a wide range of 7.5%-25% as it varies based on the amount of the loan, tenure as well as the lender. The higher the loan amount spread over a longer period of time, the lower the interest rate.

How much time it takes to process a gold loan?

Since it is a secured loan for the bank -- which means that the lender can liquidate the underlying asset to recover the money in case the borrower fails to repay the loan – the disbursal process is quite quick. Most banks or NBFCs claim they can process a gold loan application within hours of submission.

What are the repayment options?

Repayment options for gold loans are quite flexible compared with other form of loans – you can pay only interest on a monthly or quarterly basis, and repay the principal at the end of the tenor, or pay regular EMIs which combine the principal as well as interest components, or can also go for the bullet repayment option where the entire amount is repaid at the end of the loan tenor.

What If I want to prepay the loans? Is there are prepayment penalty?

In case one wants to prepay the gold loan fully or partially, most gold finance companies or NBFCs offer that option without any pre-payment penalty. However, some banks may charge a nominal fee of up to 1%.

What if I can’t repay my gold loan?

If customers fail to repay the loan even after several reminders and a small grace period, then lenders have the right to auction the gold they hold as collateral.

Is this the right time to avail a gold loan?

With gold prices crossing Rs 55,000 per 10 gm mark and the LTV ratio also being raised to 90%, it is the best time to avail a gold loan for those who need short-term liquidity push as the same jewellery can put much more money in the hands of a borrower now than it would have at the start of the year.

Is the revised LTV applicable to existing gold loans?

The relaxed LTV norms will be applicable to only new loans. However, existing borrowers can approach their lender, prepay their existing loans and book a loan again if they want to avail higher loan amount under the new norms.

(ETV Bharat Report)