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What is A Gold Loan and How Does It Work?

Leslie Alexander by Leslie Alexander
July 16, 2024
in Business
Reading Time: 3 mins read
0
What is A Gold Loan

Are you in need of immediate cash? Taking a gold loan is the best option for you. A gold loan is referred to as a loan brought against gold, i.e., in place of gold jewelry. You keep the gold as collateral or mortgage with the bank and take a loan against this collateral. The gold you keep with the bank/NBFC can range from 18K to 24K. 

Note: NBFC stands for Non-Banking Financial Company.

Under a gold loan, the banks are never at risk of losing any money since gold is not a Non-performing asset. Irrespective of any situation, gold always has value; so if the borrower becomes a defaulter, i.e., he is unable to repay the loan, the gold remains with the bank as collateral, and the borrower can repay the loan in monthly installments to the bank.

Once you pay the principal amount and all the monthly installments, you can take your gold back or apply for another loan if you wish. 

Table of Contents

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  • The Process of Taking a gold loan
  • What happens if you fail to repay the gold loan?

The Process of Taking a gold loan

  • When the borrower visits a bank or any institution, the first thing that the bank/institution does is check the quality of the gold, which can be in the form of gold ornaments, biscuits, coins, and other physical forms. By quality, what it means is purity. Knowing the gold’s purity, its value can be determined, and a loan is granted.
  • The second thing that most banks/ institutions do is check the KYC. Know Your Customer is done by the banks, which gives the bank all customer details, such as their identity and credit history, which are crucial in granting the loan. The documents included are an Aadhaar card, PAN card, Passport, Voter ID, or Driving License-all of these are acceptable.
  • Lastly, you become eligible for the loan and receive funds when the gold is verified, and the personal details are checked and verified. The bank uses a gold loan interest rate calculator to calculate the amount of interest you would be paying to the bank.

The banks/NBFC do not give you funds according to the evaluated rate on your gold. Generally, it’s 75 percent of the total value of your gold. For instance, if the original value of your gold is 5 lakh rupees, you will only get a loan of 3.75 lakhs.

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What happens if you fail to repay the gold loan?

If by any chance, you are unable to pay a monthly installment against the loan, that is excusable. But, if it continues to happen for a period of more than three months, then it becomes a problem. In such a case, it means that you aren’t in a position to repay the loan. In other words, the bank/NBFC will put up your gold for auction; they have legal rights to do so, as you agreed to keep the gold as collateral with the bank/NBFC.

Note: Remember, you have to repay the principal amount with the monthly installment. If either is cut short, you won’t get your gold back, and you’ll be declared a defaulter; this might make it difficult for you to avail any loan in the future.

Also read: What You Need to Know About Pawnshop Loans

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Leslie Alexander

Leslie Alexander

Leslie Alexander has a strong passion for writing. She is a Content Leader which allows her to share her interest with others. Leslie knows everything about how to write texts that will change your life.

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