Gold is considered one of the most valuable assets in India that can easily be liquidated into cash during tough times. People prefer investing their money in gold ornaments and coins so that they can avail maximum value of their investment in future. Thus, during financial emergencies or requirements, people prefer liquidating their gold investments temporarily into cash rather than applying for a loan in banks or financial institutions known as a gold loan or loan against gold.
A gold loan is generally described as short-term borrowing, where an individual keeps their gold investments (ornaments, biscuits, or coins) as collateral to an NBFC (Non-Banking Financial institution) for a specific tenor at a reasonable interest rate. One can avail of a gold loan to fulfil various fund requirements like medical emergencies, education, renovation, etc. without any hassle and minimal paperwork.
With so many NBFCs offering gold loans in the market, it is important to understand the concept of a gold loan in detail before applying for them.
Features and Benefits of Gold Loans
Here are some key features and benefits of gold loans –
1. Quick Procedure
The gold loan procedure involves gold testing and valuation to determine the loan amount. As soon as the valuation is completed, with minimal paperwork, the lender or lending institution disburses the loan amount.
2. Zero Processing Fee
There are zero processing or additional charges involved in the gold loan procedure.
3. Zero Foreclosure Charges
Gold loans do not involve any foreclosure charges. The individual does not have any penalties upon prepayment of the gold loan.
4. No Requirement of Income Proof
Gold loan approval does not require income proof during the documentation procedure. The borrower’s profession and earning capacity are not taken into consideration.
5. Collateral Security
The lending institution ensures the safety and security of the gold (coins or ornaments) kept as collateral with them. Upon complete settlement of the loan amount, the gold is handed over to the borrower.
6. Flexible Fund Usage
The lending institution does not question the borrower regarding the usage of funds sanctioned under a gold loan. These funds can be used for house construction or renovation, education, wedding, etc.
7. Zero Credit Score Requirement
Generally banks or financial institutions check the credit score of the applicant before any loan approval, however, in gold loans the lending institution does not check the applicant’s credit score.
Gold Loan Eligibility
There are some basic parameters to be eligible for a gold loan –
- You should be a native of India
- Your age should be between 21-69 years.
- You can be either salaried or self-employed. There is no profession-based restriction.
- The 22-carat gold kept for collateral should be marked by ISI to ensure the purity of gold.
Documents Required for Gold Loan
- Passport photographs
- Identity Proof – Aadhar card, PAN card, etc.
- Address Proof – Utility bills, passport, etc.
** Note – The eligibility and documentation requirement might differ as per the norms and policies of the lending institution.
Types of Interest Rates in Gold Loans
There are two types of interest rates offered by banks or financial institutions for gold loans –
- Fixed Interest Rate – In fixed interest rate gold loans, the interest charged on the loan amount is constant throughout the loan tenor and the borrowers pay the monthly instalments according to the pre-fixed rate of interest.
- Jumping Interest Rate – In jumping interest rates, the interest is calculated on the overdue amount, when the borrower fails to pay the monthly instalments on time. This increased rate of interest post-due date is known as a jumping interest rate.
Difference Between Fixed Interest Rate and Jumping Interest Rate
|Fixed Interest Rate||Jumping Interest Rate|
|The interest rates are fixed throughout the loan tenor.||There is an increase in the rate of the interest post-due date if the borrower fails to pay the instalment on time.|
|The interest rates are comparatively higher than the jumping interest rates.||Jumping interest rates are comparatively lower by 1-2.5%, however, if you fail to pay the instalments on time, this might make it far more expensive.|
|Any delay in instalment payment will result in minimal penalty.||Any delay in instalment payment will lead to a hike in the interest rate on the overdue amount.|
|Fixed Interest rates are a profitable deal for long-term gold loan borrowings.||Selecting a Jumping interest rate in gold loans will lead to high amounts of instalment payments every month.|
Fixed Interest Rate or Jumping Interest Rate – Which one is Better?
If you have a stable source of income and can afford to pay monthly instalments on time, you can opt for jumping interest rates, whereas if you do not have a stable income and consider gold loans as long-term borrowings, you should consider fixed interest rates.
You need to compare and analyse the total instalment amounts along with your goals and repayment capacity and then select the gold loan interest rate as per their suitability.
Gold loans are considered one of the easiest loan options for fund arrangement due to their hassle-free and seamless procedure, however, one must carefully understand the types of interest rates, before opting for one. Calculating monthly instalments via a gold loan interest rate calculator might help in making a wise decision.