The gold loan has always remained a popular borrowing option, particularly for those who need some immediate finance to meet emergencies. As they are asset-backed, lenders generally don’t consider credit scores to approve this type of loan. This makes them a great option for people with a low credit profile.
While a gold loan is easy to obtain and grants you instant funds, repayment can have some implications on your future finances. You should, therefore, be careful before applying for a loan. Here are some important things you should take into consideration when taking a gold loan.
Loan Amount on Gold
Even the best gold loan does not give you 100% of the value of your gold. Loan amounts can be anywhere from 60% of the worth of gold to up to 90% depending on the lender. The price of gold also keeps changing. Lenders generally calculate the value in one of the two ways.
Some calculate the worth of gold by looking at the gold prices in the past two weeks and using the average price per gram of gold. Others use the daily price of gold to value the asset of the borrower. You can choose the option that better suits your financial condition and gives you higher worth for your gold.
Tenor of gold loan
Gold loans are short-term loans with most institutions offering a tenor of 12-24 months in general. Loan duration is an important consideration before applying. See that you are capable of repaying the amount over the agreed period.
While gold loans are a great way to obtain some instant cash to meet emergency financial needs, a failure to pay back the amount on time can result in serious consequences. The lender can sell or auction your gold jewelry or coins if you fail to repay the loan as agreed. It is, therefore, essential that you choose the loan tenor keeping your finances in check.
Interest Rates
The gold loan interest rate varies depending on the lender you choose. However, most lenders calculate the interest in one of the two ways:
Fixed-Rate –The rate of interest on the loan amount remains unchanged over the tenor, so the borrower pays the same EMIs during the entire repayment period.
Floating Rate – This type of interest rate keeps changing under market conditions. The EMIs can thus increase or decrease based on the rate.
The interest rate on a gold loan is determined by the lender on the basis of factors like loan tenor, LTV ratio, loan amount, and others. It can range from 9% to up to 26% per annum for different loan amounts and lenders. A higher loan-to-value ratio means greater risk for lenders and the lender can charge a higher interest rate to make up for the risk. It is, thus, important to compare the interest rates offered by different lenders before making a decision.
Repayment Structure
Obtaining a gold loan is one thing; repaying it responsibly is another. The mode of repayment is an important consideration before applying for a gold loan. Most lenders and borrowers agree on an EMI mode of repayment where the amount and interest are paid off as monthly installments. At the end of the tenor, the gold is returned back to the borrower after clearing all the dues.
Another popular repayment structure for gold loans is Bullet payment where the borrower pays the full loan amount along with the interest at the end of the loan tenor. Some lenders even ask for Upfront Interest where the borrower pays the interest on the loan at the beginning of the tenor and the loan amount at the end.
Processing Fee
Every lender charges a fee for processing the gold loan and the charge can vary between institutions and loans. It is generally a small percentage of the loan amount, though some lenders charge a flat processing fee. It is important that you check this with your lender before applying for a loan.
Disbursal Time
Gold loans have some of the quickest disbursal times among the borrowing options available. Most loans are disbursed within hours of submitting the application. This is because the approval process involves determining the value and quality of the gold and there is no complicated process like evaluating the credit profile of the borrower.
Some lenders have speeded up their process even further with digitalization. You can now apply for an online gold loan from the comfort of your home and get your amount transferred to the account in minutes.
Lender Credibility
Before choosing your lender, you must do some research to find out whether other people find them reliable. Check what security steps the lender takes to protect your assets. Finding the best gold loan lender is important because you should be confident that the gold you are pledging stays safe during the tenor of the loan.
Go with a trustworthy financial institution that offers guaranteed protection. The chances of fraud are greater with lesser established institutions and local jewelers. So, be extra careful when selecting your lender.
Gold loans offer a convenient means of obtaining instant funds for pledging your valuable assets. As they are backed by security, these loans are easy to obtain, even for those who don’t have a good credit history.
However, borrowers should not end up picking the first lender or loan they come across. It is important to compare the options and offerings and take into consideration the above-discussed factors to make sure you get the best deal and experience.
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