The past year and the recent few months have been tough times for many people in terms of cash liquidity. If you are one of them, here is one way to sort your temporary money crunch – gold loans. Gold loans are a better solution to your money problems as compared to personal loans for reasons such as better interest rates, easier processing, and repayment flexibility.
Currently, the COVID -19 pandemic situation has only made lives harder with cuts on incomes and loss of employment. Numerous families have faced short term cash imbalance and deficit. For situation like that, gold loans might best suit you as it yields quick money with minimum paperwork. To make the gold loans more beneficial to such families, the government made changes with the Loan to Value (LTV) ratio. As of April 1, 2021 the Reserve Bank of India (RBI) has increased the LTV from 75% to 90% depending on the institution.Theloan-to-value (LTV) ratio isan assessment of lending risk that banks, NBFCs, and other lenders examine before approving a mortgage and ideally, loan assessments with high LTV ratios are considered higher risk loans.
Gold loans can be easily availed by pledging your gold, either jewellery, coins, or bars, with the financial institutions against a loan amount. The institution runs a complete evaluation of your gold loan application before the loan is given against your gold. And the best part is that the lenders do not pay much heed to your credit score or repayment capacity. However, there are several factors that need to be kept in mind before applying for a gold loan.
When looking at lenders, there are two aspects to consider, who are you getting the loan from and what is their credibility. Gold loans are provided by banks, Non- Banking Financial Companies (NBFCs), money lenders, and local jewellery shops. You have to be careful who you choose to avail loan from. Although most financial institutions can be trusted, banks and NBFCs are regulated by the RBI while other lenders are not. Hence, interest rates, processing time, and value for gold would differ according to the source and sometimes might even be unfavourable to you. Thus, ensure that you have an answer to the question of whether ‘Can this lender be trusted with my money’, before availing the loan. IN terms of LTV, banks have the highest LTV value of 90% while NBFCs have only up to 75%.
Value of Gold:
Lenders look for a minimum of 18 karat gold when lending money for the gold. You must also note that gems and stones are not evaluation when calculating the value of gold. Thus, along with the LTV ratio, the higher your gold value, the higher your loam amount. You must also remember that some lenders do not accept gold bars and have restrictions in purity of gold when pledging coins. Hence, the purity affects your LTV and ultimately the amount that is loaned to you.
When availing loan against gold, one thing you must look out for is the tenor of the loan. Gold loans are generally short term. Most institutions provide a 1-year period for gold loans. Some may extend it for 36 months, depending on the terms and conditions that have been mutually agreed on, but not longer.When considering the tenor, also consider your ability to repay the loan within the tenor of the loan. If the situation arises that you are unable to pay the loan amount within the tenor period, your gold will be auctioned with terms unfavourable to you.
In general, gold loans provide the lender more security than personal loans since the lender receives collateral for loan against gold. Thus, the gold loan interest rate is lesser than that of personal loans. These rates vary from lender to lender. On average, they range between 9% and 29%. Generally, NBFCs charge a higher interest rate due to their higher cost of funds and local lenders charge irrational rates if they are fraudulent.
Repayment terms and foreclosure charges:
The terms for repayment differ according to the lender and are flexible in most cases. While some institutions and lenders permit Equated Monthly Instalments for payment (EMIs), many other lenders also offer the bullet payment option.With bullet payments, the lender deducts the interest amount upfront from the loan amount.While some lenders prefer one of these two options, other lenders would prefer you either pay the interest amount upfront and the loan amount later, or you can pay the interest and the loan together towards the end of the tenor. While these options are available with some lenders, another repayment term that certain lenders have is the ability to withdraw your gold loan as an overdraft and use it as per your requirements. Along with these are the foreclosure charges that you must keep note of. certain financial institutions charge valuation charges, processing fees, and outstanding loan charges up to 1%.
Considering all these factors, gold loans are best suited for many in terms of interest, repayment terms, and quick processing. The best time to avail a gold loan is when the gold prices are on the high. You can find the best gold loans at Bajaj Finance Limited the lending arm of the Bajaj Finserv Group, at suitable interest rates, and with the right evaluation. Be aware that your gold will be released only after repayment.