Taking a loan against gold may seem like an unusual idea, but it isn’t. In India, over 1,250 tons of gold is pledged across the gold loan industry. This ancient practice continues to be valid, even during times of a coronavirus pandemic. Learn about the various features of a loan against gold, including the repayment tenure and Interest rates. Listed below are the different benefits of this loan type.
Interest rates
A gold loan is a type of secured credit facility where you pledge the value of gold as collateral. Gold prices fluctuate day-to-day, but most banks estimate the value of the collateral as the market rate on the day of application. Because of this fluctuation, the interest rate for gold loans can vary from 7% to 18%. The interest rate depends on several factors, including the value of the gold and the borrower’s income.
The amount of the loan depends on the quality of the gold articles. Agricultural gold loans, for instance, are offered to farmers for agricultural purposes and have a rate up to 2% lower than a regular gold loan. The method used to calculate the interest for a gold loan is called the flat rate method. This method calculates interest on the original loan amount, but the principal amount remains constant. The reducing rate method, on the other hand, calculates interest on the amount that remains unpaid after a certain period of time. This method reduces the amount of interest the borrower owes over time.
Repayment tenure
When it comes to repayment tenure, there are several different options available for people who would like to buy gold. Some people opt for a monthly EMI (Equated Monthly Installments) while others opt for a bullet repayment, which requires the borrower to pay only interest. Bullet repayments are convenient because they do not require the borrower to pay interest every month; the principal amount is paid at the end of the loan term. However, this method may not be suitable for people with irregular income or limited monthly inflow.
While most lenders offer a 30-month repayment tenure, some lenders will allow you to choose a longer repayment term. Mortgage loans, on the other hand, can have a repayment period of up to 15 years, giving you more time to plan your finances and achieve your goals. Typically, a gold loan offers a longer repayment period, lower interest, and a lower monthly payment than a loan against a property. However, if you’re looking for a loan against your property but don’t need a large amount of money or want to do so without much documentation, a gold loan is the right option for you.
Loaning money for scrap gold
Loaning money for scrap gold is a popular way to recover a large portion of the monetary value of your precious metal. Furthermore, they do not charge any evaluation fee for gold. Hence, the process is much simpler. If you have broken or unwanted gold jewelry, selling it for cash can be a great option. Moreover, the purchaser will evaluate the amount of gold and the purity of the gold. The buyer will pay you quickly after assessing the weight and purity of the item. Moreover, if the buyer is unhappy with the product, they can request for a refund.
Purity of gold pledged
In order to be eligible for a loan against gold, you must have a high-quality gold ornament. This is because the Reserve Bank of India has set stricter loan norms for gold ornaments. Lenders will only approve loans on gold objects that have a purity of eighteen to twenty-two carats. The purity of gold will determine the loan amount. You should be aware of this as it may affect the amount you can borrow.
You can borrow up to seventy-five per cent of the market value of gold. The lender will consider the purity of your gold and the rate of gold in the marketplace before determining the loan amount. Once your gold item has been approved, the lender will disburse the loan to your account. The lender will set a flexible repayment period based on your financial capacity and your short-term cash needs.
Loan-to-value ratio
The recent variation in gold rates has radically affected the loan-to-value ratio of major gold loans. This ratio now stands at almost 60%, favoring organized lenders and rejecting their popular NBFC opponents. In addition to the incline, the exclusion of NBFCs from improved loan-to-value ratios could limit their business potential, as they will not be able to serve marginal borrowers.
As a result, the Reserve Bank of India (RBI) increased the permissible loan-to-value ratio for gold loans. Depending on the value and quantity of gold, the LTV ratio may range from 75% to 90%. Lenders, however, are required to maintain a cap on the total disbursed amount, limiting it to 40 per cent of the debtor’s monthly income.
Requirements for obtaining a loan against gold
The requirements for obtaining a gold loan are easy, but you must have a few important documents to prove your identity, address proof, and repayment capability. Depending on your circumstances, these may include your passport, Aadhaar card, driving license, and photo credit card. You may also need to provide a letter from an authority that can vouch for your identity, such as the ration card or your bank statement.
The process of obtaining a gold loan is easy and hassle-free, but you must have sufficient gold assets to qualify. You must also submit documents that prove your identity, income, and debt, and you should measure the weight of your gold assets. There is a gold loan calculator available online to calculate the exact amount you can borrow. If you don’t have the gold articles you need to sell, it’s best to approach a bank or NBFC and discuss your options.
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