Five reasons why gold loan is a good idea for emergency funding

Emergencies rarely announce themselves, and it is wise to be prepared for them. However, there are always times when no amount of preparations is sufficient. Arranging for funds during such emergencies can be harrowing. In such a situation, the easiest option is to opt for a loan; however, that may not always be easy. The hurdles can be many: a low credit score, high interest rates, extensive documentation, delayed disbursal of loan amount, or a mix of these. In such situations, a loan against an asset such as gold could be your way out.

Most Indian families have a significant amount of their assets tied up in gold. Globally, we are one of the largest consumers of the yellow metal. And in times of need, this gold – regardless of whether it is in the form of bullion or ornaments – can be used as security to borrow against. Gold loans can solve a number of problems one is faced with while attempting to get an unsecured personal loan.

Interest rates

The biggest advantage of a gold loan is that it is a secured loan with a lower interest rate compared to an unsecured personal loan. The lender holds your gold as security and therefore their risk is lesser. This makes the loan very competitively priced compared to personal loans.

Loan amount

Gold loans allow you to borrow a larger quantum of loan. Depending on the lender, you can get anywhere from Rs 10,000 to Rs 1crore or more against your gold. You can borrow up to 75% of the value of the pledged gold. The gold is usually valued at the average of the closing price of 22 carat gold for the preceding 30 days. If the gold is of lesser carat, then it is valued proportionately.

Repayment options

Gold loans are particularly attractive because of the number of repayment options they offer. Some may allow you to pay the interest every month and the principal at one shot at the end of the tenor. Others may require you to pay a part of the principal every month. Yet others may actually deduct the interest owed when they give you the loan. You need to understand the financial implications of each of these options before you take a call.

Eligibility criteria

Gold loan comes with simple and easy-to-meet eligibility conditions. Typically, anyone between the age of 21 and 65 years can apply for a gold loan against gold owned by them or their family. The processing fees is low, and often, the lender may not take the income or credit score of the borrower into account while approving the loan.

Processing

There is no complicated documentation process when it comes to gold loans. Consequently, the time required to process a gold loan is very small compared to other forms of secured loans. This makes it possible for borrowers to get a short-term loan very easily.

While gold loans are an excellent way to source funds during an emergency, there are a few things you must keep in mind. Approach only a regulated financial institution such as banks or NBFCs for a gold loan. Informal lenders such as jewellers are not regulated entities and the chances of fraud are much higher in this case. Remember that the credibility of the lender matters as you are keeping your gold with them. The value of the gold is higher than the loan value and you need to be sure that the gold you have pledged is safe with the lender. So choose a bank or NBFC regulated by the RBI to pledge your gold.

Understand the terms and conditions of the loan, including the repayment option and its implications, prepayment, processing fee, and other charges. All this will add up to the cost of your loan. For instance, usually there is no prepayment charges for gold loans. However, some lenders may charge up to 1% of the outstanding amount as charges under certain circumstances. Some may also charge a gold valuation fee.

Like with any other loan, gold loans come with consequences if you default on the repayment. If you fail to repay the loan in a timely manner, your pledged gold may be seized and auctioned to recover the outstanding balance. It will also have a negative impact on your credit history and score.

In short, understand the financial implications of the terms and conditions and choose the option that works best for you.