What Is Gold Loan ?
A gold loan is a secured loan in which the borrower holds their gold, ranging from 18K to 24K, with a bank or financial institution as collateral and obtains capital against it. In comparison, a it is similar to a “mortgage loan” in which the owner keeps their house or property as a mortgage with the bank and takes out a loan against it to meet their capital needs.
There are two forms of loans: secured and unsecured. Unsecured loans, such as a personal loan, are made with no collateral. A secured loan, such as a gold loan, is offered in exchange for collateral, in this case, your gold ornaments. Because the lender has collateral or security against the loan, they are typically less expensive than unsecured loans. A gold-loan is when you use your gold ornaments as security to obtain money from a lender. The amount approved as a loan is often a proportion of the total cost of the gold deposited.
How Do Gold Loans Work ?
A gold loan is one of the most profitable loans for banks since it eliminates the risk of non-performing assets. This is because the jewellery used as collateral remains with the bank even if the borrower fails to make the monthly instalments (EMIs) on their loan.
When a customer applies for a gold-loan, the financial institution first assesses the purity and worth of the jewellery as security. The Reserve Bank of India (RBI) requires banks to perform Know Your Customer (KYC) checks on their customers, including identity, credit history, and loan eligibility.
To approve a gold-loan, the financial institution and consumer agree on loan conditions after determining the jewelry’s quality and value and completing the KYC procedure. Following agreement, the loan is approved, and the funds are credited to the borrower’s account. This entire process can be done within a few of hours.
Types of Gold Loan
1. Retail Gold Loan :
Bank of Baroda’s Retail Gold Loan is a secure approach to discover the true worth of your gold. We understand that unforeseen needs or crises can occur at any time, and our retail gold loan will help you get the money you need immediately. Our simple method means you won’t have to worry about exorbitant gold-loan interest rates or lengthy processing waits. Our gold-loan options are suited to your specific needs and can be obtained simply by pledging your gold ornaments or coins. At Bank of Baroda, we are committed to providing you with the best-in-class gold-loan services, making it the ideal choice for everyone.
- Guarantor is not required for gold loans.
- Easy to convert into cash.
- Income evidence is not required.
- Secure your gold ornaments, jewellery, and coins.
- Pricing is not based on CIBIL score.
- Minimal paperwork and faster processing.
2. Agri Gold Loan :
Looking to broaden the scope of your agricultural business and related activities? Bank of Baroda welcomes farmers and individuals involved in agricultural operations to apply for the Agriculture Gold Loan. The Bank of Baroda Agri Gold-Loan offers several benefits and is a financing option designed to enable quick access to loans by leveraging your gold assets. Borrowers with the Bank of Baroda Agriculture Gold-Loan can get quick and easy access to funds at affordable gold-loan interest rates to suit their short- and long-term financial needs. The loan product has numerous repayment choices, making it an excellent solution for people seeking financing for agricultural or related uses.
- Max Loan up to Rs. 50.00 lakh per client.
- No processing fees up to Rs. 3.00 lakh.
- There are no pre-closure or prepayment charges.
- Easy repayment terms Maximum of 12 months.
- Gold Loan for at least 18 carat gold jewellery or ornaments.
- Loan for any agricultural and related operations other than speculation.
Features of a Gold Loan
Interest rates on gold loans vary depending on the quality of the gold. The better the purity of gold, the greater the amount available. Interest rates in the public sector range from 8% to 18% per year, while private sector rates can reach 24% per year.
Haircut and loan to value ratio (LTV)
According to RBI norms, banks can lend up to 90% of the value of gold, meaning at least a 10% haircut. The real loan-to-value ratio typically ranges from 55% to 65%, resulting in a margin of 35% to 45% for banks, making it the safest credit.
The loan-to-value ratio, or LTV ratio, refers to the amount received by a customer in relation to the worth of gold. For example, if the value of the jewellery is INR 10,000 and the LTV is 65%, the consumer can obtain a maximum loan of INR 6,500.
A gold loan is often a short-to-medium term loan with a tenure ranging from six months to 24 months. Thus, it is not a long-term lending instrument.
Loan available even to low credit scorers
Because the jewellery would be deposited with the bank as collateral against the loan, the bank feels confident in issuing the loan to the individual even with a low credit score.
The weight and value of stones are not counted
Despite their high worth, precious stones are not considered when calculating a gold loan. Only the value of gold is used in the computation, hence a digital gold product is often preferred over a regular product for pledging.
Benefits of a gold loan
Gold loans are comparable to personal loans in that they address your immediate financial needs, such as international education, wedding expenses, medical problems, or any other personal usage.
- Gold loans are secured and need minimal verification, resulting in faster disbursement.
- Flexibility of usage: With no monitoring of the ultimate usage, you can use the loan for any type of spending.
- Secured loans demand only promised gold ornaments as collateral. No other security is required.
- Gold loans offer cheaper interest rates than personal loans due to their collateral.
- Consider liquidating your idle asset, as gold is rarely used to generate revenue. As a result, a gold-loan is an excellent way to borrow capital and use the funds when you need them to satisfy your financial obligations. It is also more secure inside a bank or financial institution’s locker than at home.
Who Should Choose a Gold Loan?
Those with a short-term funding requirement
Gold loans are commonly used as working capital loans in enterprises to meet short-term funding needs. In such cases, a gold loan is preferable to a personal loan with higher interest rates on a relative basis.
People with a low credit score
The bank is willing to advance a gold loan to a person with a bad credit score because the jewellery serves as security for the loan.
Those who own gold but are taking out a personal loan
People who are seeking a short-term personal loan and have gold sitting idle in lockers can consider obtaining a gold loan instead of a personal loan to save money on interest.
Those opting for gold loans from the unorganised sector
Users consider taking out a gold loan from unorganised players because they are afraid of being rejected by organised financial institutions that may refuse to lend to them due to their credit history. Such consumers wind up paying high interest rates ranging from 25% to 50% every year.
Opting for a gold loan from banks and other organised players is a preferable option because the loan is entirely secured and credit history has no bearing on it. This would assist to save on interest costs because banks are required to charge interest in accordance with RBI guidelines that are market-compliant and not excessive.