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How does Gold Loan Work in India?

Loans are a known phenomenon in the growing world. When a borrower needs a huge amount of money for particular reasons he/she requests loans. These reasons can be buying a new car, purchasing a dream house, wedding expenses, or unexpected medical reasons. Loans are of two types, Secured Loans and Unsecured loans. Secured Loans are loans where the borrower has to put or give something to the bank as collateral against their borrowed loan while in Unsecured Loans no such security is required. Collaterals or security could be your shares or even your gold articles. Loans that belong to the secured kind are Gold loans, Loans against property/Mortgage loans, or even Car loans. Unsecured loans can be Personal loans, Credit cards, student loans etc. 

Gold loans are loans where the borrower puts their gold articles or ornaments as collateral to the bank. The lender keeps the gold till the borrower manages to repay the loan amount. It is one of the fastest forms of loans to get quick funds for emergency cases. It is also favoured because of the affordable interest rates. You can borrow a gold loan without having to worry about a low credit score or CIBIL score. In this article, we tell you about how gold loan works along with their features, eligibility and documents. 

Features of Gold Loans

Before we discuss how gold loan works, let us look into the features that accompany gold loans. 

Interest rates 

The interest rates provided on gold loans are very low and affordable. The rates depend on the purity of your gold article and sometimes even when you have a well-established relationship with the lender. The rate of interest generally varies from 8% to 18% per annum in the public sector while in the private sector it can range up to 24% per annum. Having a low rate of interest decreases the worry about the EMI payment. 

Tenure of the loan

The tenure of the loan depends on you. The lender adjusts according to what is a comfortable tenure for your loan repayment. It ranges from 6 months to 48 months. This makes it a small yet convenient loan option.

LTV (Loan to value ratio)

LTV or Loan to value ratio indicates the loan amount the borrower can receive against the gold articles they present. According to the RBI’s guidelines, the maximum ratio of the overall gold value a bank can give is 90% and the minimum is 65%. This creates a margin of 35% to 45% for the bank, making it the safest type of loan for the banks. Let us assume your overall gold is valued at 10 Lakh then the maximum you can get is 90 thousand and the minimum is 65 thousand. 

Quick process

This loan type is the fastest in both approval and application. The documentation process of it is very simple and small thus can be done quickly. Nowadays, banks have provided application forms online as well, making the application process even more speedy. The lender can approve your loan amount in 24 hours, if he/she sees you eligible enough and the correct needed documents. Once that is done the amount is immediately transferred to your account. 

Eligibility required for Gold loans

Now that we are well aware of the features of gold loans as mentioned above, let us look at the factors that make you eligible enough to apply for a gold loan. Every lender has a different set of eligibility criteria but here are the common ones.

  • The applicant should be an Indian citizen.
  • The applicant can be a salaried or self-employed person, a farmer or even a housewife.
  • Even if the applicant has a low credit score or CIBIL score, they are still eligible.
  • The applicant should have enough gold to vouch on. 

Documents required for Gold Loans

Given below are the documents required while applying for a gold loan.

  • Identity proof of the applicant (Pan card, Aadhar card, Driving licence, Voter’s ID)
  • Address proof of the applicant (Passport, Aadhar card, Utility bills like Electricity bills / Telephone bill)
  • Two passport sizes photos of the applicant
  • The receipt of the gold articles which are going to be collateral (this depends on the lender)

How a Gold Loan works in India?

The process of issuing a gold loan is the same as other secured loan types. For a bank, these types of loans are free from any kind of stress or worry of NPA (Non-performing assets). An NPA refers to the type of loans that are in default or arrears. A loan is said to be in default when the borrower fails to complete or oblige to the agreement drawn by the respective lender. The bank uses the gold articles as collateral if the borrower misses the payment of their EMI. The lender follows a set of steps to evaluate before making a final decision. The lender checks the:

  • Quality of the gold the borrower wants to deposit as collateral. The lender issues the loan amount based on the purity of the gold. Hence, the lender checks on the quality and then decides on the loan amount. 
  • The credibility of the applicant through the provided documents. The lender checks the applicant’s identity, past bank or loan transactions, their loan repayment capability among other crucial factors. 
  • Once the lender is satisfied with the survey of both the client’s background and the quality of gold, the lender makes the decision. If the lender is convinced with the application, they grant the loan amount requested. The loan amount is based on the quality of the gold articles presented. If the loan is approved, the requested amount is transferred to your bank account within the next 24 hours. 

The rate of interest offered by certain banks 

The table given below shows the different rates of interest that different banks offer for gold loans. 

THE BANKS THE RATE OF INTEREST 
Axis bank 13.50% to 16.50% p.a.
Canara bank7.35% p.a. onwards
HDFC bank11% to 16% p.a.
Muthoot bank12% to 26% p.a. 
SBI bank7.0 % p.a. onwards 

Gold loans are the most convenient and affordable types of loans. It is the most reliable compared to other loans. It has the lowest rate of interest. The tenure for you to repay the loan amount is decided according to your convenience. The loan amount is based on your gold article’s quality therefore the better the gold you get a better loan offer. A person with a low credit score also does not have to worry since the score does not matter. 

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