What Is A Gold Loan? How Does It Work?

The largest consumers of gold in the world is India. According to the World Gold Council, the yearly demand for gold in India between 1987 to 2016 increased up to 804 per cent. The trend will not die anytime soon, thanks to the pandemic. The metal, apart from being used for industrial, commercial, and investment purposes, can be used to avail of the gold loan for financial emergencies. In fact, the loan is the easiest and fastest way to acquire funds when needed.

Even if you hold a low score but have ample of gold lying idle in the locker, it can act as a tremendous monetary solution. With the gold loan popularity increasing every year, it is imperative to know how it works, the interest rates, and other related information.

Definition:

Also called a loan against gold, is a secured one that borrowers take from lenders in exchange of gold ornaments, biscuits, coins, etc. The amount sanctioned is typically the specific percentage of gold value. You can repay them through EMIs post which you get the metal back.

Unlike other secured loans like motor loans or home loans, there are no restrictions on the end usage of the loan. You could use them for funding a wedding, family vacation, or child’s education. Moreover, banks and NBFCs offer gold loans at affordable interest rates.

Working of the loan:

The process is like any other secured loan. Here, you take your gold element to the lender along with necessary documents. The lender evaluates the elements and verifies the submitted papers. According to the evaluation, the lender approves of the credit. According to the gold loan agreement, you repay the principal amount along with interest rates and get the pledged elements back.

Eligibility:

Anyone who has gold can get the loan. Unlike personal loans, the eligibility criteria are not as stringent. You can apply for the loan if you are an Indian resident, which includes salaried, self-employed, business people, homemakers, and so on. Although the credit score is essential, a marginal rating works for gold loans. But you need must have enough gold to pledge.

Tenure:

The tenure varies from lender to the other. It ranges between three to 12 months. Based on the case, some lenders offer lengthy tenure and allows you to renew them for extending the mandate. Since the loan against gold duration is short, make sure you repay the amount on time. Defaulting could make you lose out on the gold elements forever.

Repayment:

The repayment of the loan depends on the lender. Most of the financial institutes allow you to pay the interest amount initially and the principal amount at the end of the duration. The EMIs are usually a mix of both, and the payment happens simultaneously.