A gold loan is a secured loan wherein the borrower keeps their gold, ranging from 18K to 24K, with a bank or a financial institution as security and avails capital against it. On comparative terms, a gold loan can be understood as a similar concept to a “mortgage loan” in which the owner keeps their house or property as mortgage with the bank and takes a loan against it to fulfill their need for capital.
How Do Gold Loans Work?
A gold loan is among banks’ profitable loans as banks are free from the worry of non-performing asset (NPAs). This is because the jewelry which is taken as collateral remains with the bank even if the borrower defaults on the payment of their monthly instalments (EMIs) on their loan.
The way a gold loan works is:
- Checking the quality: When a customer approaches a financial institution for a gold loan, the first step the institution takes is to check the purity of the gold jewelry that is being considered as collateral along with determination of value of the jewelry.
- Know Your Customer (KYC): Know your customer norms and checks as stated by the Reserve Bank of India (RBI) are performed by the bank, where the bank gets to know their customer’s details such as identity, credit history, the necessity for applying for a loan and other details crucial in granting the loan.
- Approval of gold loan: Once the quality and value of jewelry is determined and the KYC procedure is complete, the loan terms are agreed upon by both the financial institution and the consumer. Upon agreement, the loan is approved and the amount is then credited to the borrower’s account. This entire process can be completed within a couple of hours.
Features of a Gold Loan In 2024
Interest rates
The interest rates on gold loans vary based on the purity of gold. The higher the purity of gold, the higher the amount that can be availed. Interest rates vary from 8% per annum to 18% per annum in the public sector, whereas in the private sector these rates are as as high as 24% per annum.
Haircut and loan to value ratio (LTV)
According to the RBI’s guidelines, banks can give a maximum of 90% of the value of gold as loan, implying a minimum 10% as haircut. Generally, the actual loan to value ratio varies from 55% to 65%, which means around a 35% to 45% margin for the banks, making it the safest loan for banks.
Loan to value ratio or LTV ration means the amount a customer will get against the value of gold. For example, if the value of jewelry is INR 10,000 and the LTV is 65%, the maximum loan amount the customer can get would be INR 6,500.
Tenure
A gold loan is generally a short-to-medium term loan, where the tenure ranges from six months to 24 months. Thus, it is not a long-term loan instrument.
Loan available even to low credit scorers
As the jewelry will be deposited with the bank as collateral against the loan, the bank is confident of sanctioning a loan to the person even with a low credit score.
The weight of stones and their value is not counted
Even though precious stones have high value, they are not considered at the time of calculation for a gold loan. Only the value of gold is taken into consideration for the calculation, thus many a times a digital gold product is preferred against a regular product for the purpose of pledging.
Who Should Opt for a Gold Loan?
Those with short-term fund requirement
Gold loan works as a common working capital loan in businesses fulfilling the short-term requirement for funds. In such scenarios, a gold loan is preferred against a personal loan with adverse interest rates on a comparative basis.
Those with low credit score
As the jewelry acts as a collateral against the loan, the bank is comfortable in advancing a gold loan even to a person with a low credit score.
Those who have gold but are taking a personal loan
People who are considering a personal loan with a short-time duration and have gold lying idle in lockers should consider taking a gold loan instead of a personal loan in order to save up on the interest cost.
Those opting for gold loan from the unorganized sector
Users consider opting a gold loan from unorganized players amid fears of rejection from organized financial institutions that may not provide them a loan because of their credit score history. Such users end up paying hefty interest rates ranging up to 25% to 50% per annum.
Opting for a gold loan from banks and other organized players is a better option since credit history is not a factor that impacts the loan given a gold loan is completely secured. This would help save the interest cost as banks are required to charge interest as per RBI norms, which are market-compliant and not exorbitant.
How to Apply For a Loan Using Digital Gold in 2024?
With the introduction of digital gold products, people now have access to a more lucrative option in order to reduce the overall interest burden on gold loans.
You could consider liquidating your physical pure gold (available as “vedhnis”, biscuits, coins and bars) and converting the cash into the digital sovereign gold bonds (SGBs) form. This would help you in two ways: one in securing the funds required and second in earing an interest income of 2.5% annually on the face value even during the loan term, thus reducing the overall cost of credit. For instance, SBI’s interest rate for loan against SGBs is 9.25% but as the underlying is an SGB, the effective cost would be 6.75% per annum.
Tax Benefits Of Gold Loans:
Tax benefits that are associated with the utilization of the gold loan for specific reasons include:
- Purchasing of a house or improvements thereto: Tax benefits can be availed under Sections 24 (b) and 80C of the Income Tax Act, which allows the exemption of the qualifying portion of interest expense and the principal repayment respectively, effectively reducing the overall cost of credit.
- Business interest cost: Interest expense on gold loan taken for business purposes can be claimed while filing tax returns as a business expense, effectively saving upon your tax liability.
Bottom Line
Gold loans, in general, serve as a source of support when you need capital urgently. You should not only understand such products in order to tackle future necessities but also understand the upcoming new variants that are safer and effectively reduce the overall interest burden on the loan.
