This article talks about everything you need to know before taking a gold loan.
A gold loan is simply a loan against the physical pledge of gold. Physical gold can be in the form of gold bars, gold coins, gold jewelry, or ornaments. A gold loan is considered a simple and easy way to monetize your gold. Anyone with gold can apply for gold loans with banks, local jewelers, or NBFCs. There are many NBFCs that specialize in giving gold loans such as Muthoot Finance and Manappuram Finance. Although both gold and personal loans serve the same function, people prefer gold loans as interest rates on these are much lesser than on personal loans. None of the lenders provide 100% loans against the gold value. Normally, lenders provide 65-75% loans on the actual value of gold depending on the policies of the lender. Gold loans function in a simple manner, where you keep your gold with the lender as collateral and get it back on repayment of the loan. Opting for gold loans is always preferable to selling your gold.
Features of Gold Loan
- Tenure: Gold loans are usually short-term loans, for periods between 1-2 years. As gold loans are short-term, borrowers must be ready to repay them within the stipulated time. Borrowers may approach their lenders for the extension of their loan based on mutually agreeable terms and conditions.
- Lenders: Borrowers have the option to choose among several banks, NBFCs, or even jewelers. Generally, banks and reputed NBFCs are considered trustworthy sources, but borrowers should be extra careful while taking loans from other lenders. Borrowers can also carry out background checks of their lenders to reduce the risk of being defrauded.
- Loan Amount: The loan amount that borrowers get against their gold varies from lender to lender. For example, ICICI Bank gives gold loans for Rs. 10,000 to Rs. 1 crore, while Muthoot Finance gives loans starting from Rs. 1,500 with no upper cap on the loan amount. Normally, lenders provide 65-75% loan amount against the actual value gold kept as collateral. Lenders keep this margin to provide for future uncertainties.
- Interest Rates: Interest rates vary widely from lender to lender. The interest rates on gold loans are usually less than personal loans. NBFCs charge higher interest rates compared to banks as they generally have a higher cost of funds.
- Repayment Process: Generally, gold loans are repaid through regular EMIs. On the payment of the last installment and when all remaining dues are settled, the gold kept as collateral is returned to the borrower. Other repayment options include bullet repayment, where borrowers need to repay the entire loan amount with interest as a lump sum at the end of loan tenure or partial payments, where borrowers can repay the loan amount as and when they see fit, but before the due date or only interest as EMI, where borrowers pay only the interest amount per month as EMI, and the principal is repaid in full at the end of tenure.
- Fees & Other Charges: Apart from the interest charged on gold loans, there are various other charges that borrowers must be aware of before taking gold loans. Borrowers need to pay loan processing fees of around 0.5-2% of the loan amount before the loan is executed. Generally, bank charges loan processing fees, while some other lenders might not charge them. Some of the other charges that a lender may charge are valuation fees, loan renewal fees, late payment fees, prepayment penalties, and GST or service tax.
- Prepayment of gold loans: Borrowers have the option to prepay their gold loans and close their accounts. Few of the banks do not charge any prepayment penalty after three months of the sanction date. Some lenders may charge borrowers between 0.5-2% of the loan amount during foreclosure of their account.
Eligibility and Documentation
The applicant must be above 18 years of age with a stable source of income and can be a maximum of up to 65 years of age. It is mandatory for the applicant to get their gold appraised by a bank-nominated appraiser to confirm the value and purity of the gold. In the application process, banks generally ask for the following documents:
- Application Form (Duly filled) with at least 2 passport-sized photographs
- For the purpose of KYC, documents such as Passport, Voter’s ID card, Driving License, Aadhar card, PAN card, or Utility bills of water & electricity
- Bank Statement of last 12 months
- Any other documents as per the requirement of the lender
Gold Loans from Banks Vs. NBFC
Both banks and NBFCs offer gold loans to their customers. Many NBFCs specialize in giving gold loans. Some points of comparison between banks and NBFCs with respect to gold loans are:
- Generally, interest rates offered by banks are lower than those offered by NBFCs. Further, interest rates are even lower for public sector banks.
- Though interest rates are higher for NBFCs, loan disbursal procedure is much faster with them compared to the banks. The documentation required by NBFCs is also less cumbersome.
- NBFCs usually give more repayment options to their customers. The option of only interest as EMI, where borrowers pay only the interest amount per month as EMI, and the principal is repaid in full at the end of tenure is provided only by NBFCs.
- While some banks may charge a prepayment penalty, but normally NBFCs do not charge any kind of prepayment penalty or fees.
Therefore, customers face a trade-off between lower interest rates and simple and speedy loans. If borrowers want to take a gold loan at lower interest rates, they should opt for banks. They can further compare the interest rates offered by different banks. But if the borrower needs a quick and speedy gold loan, then they must opt for NBFCs.
Consequence of Failure to repay Gold Loan
In the event where borrowers fail to repay their gold loans in a timely manner, the banks and other lenders send a follow-up reminder, and they even levy a late payment fee. Most lenders charge this fee at up to 2% of the unpaid loan amount over and above the applicable interest rate. On repeated failure of borrowers to repay their loan despite reminders, the pledged gold may be seized and auctioned by the lenders to recover the outstanding loan balance. Furthermore, such defaults adversely affect the credit history and score of the borrower.
Gold Loans by different lenders Comparison
| Name of the Lender | Interest Rate | Loan Amount | Processing Fee |
| State Bank of India | 7.50% p.a. onwards | Rs. 20,000 to Rs. 50 lakhs | 0.25% of the loan amount (Nil if applied through YONO app) |
| Punjab National Bank | 8.75% p.a. onwards | Rs. 25,000 to Rs. 10 lakhs | 0.75% of the loan amount |
| HDFC Bank | 9.90% p.a. onwards | Rs. 25,000 to unlimited | 1.5% of the loan amount |
| ICICI Bank | 11% p.a. onwards | Rs. 10,000 to 1 crore | 1% of the loan amount |
| Muthoot Finance | 12% p.a. onwards | Rs. 1,500 to unlimited | As per the agreement |
| Axis Bank | 12.50% p.a. onwards | Rs. 25,001 to Rs. 25 lakhs | 0.5% of the loan amount |
Please note that the above-mentioned list is not exhaustive. There are many other lenders in the market, and it is advised to check their respective gold loan terms on their official websites to make an informed decision.
The mentioned details in the table are subject to change at the sole discretion of the lender. Further, GST and service tax is levied over and above the mentioned charges.