A gold loan is a loan which is secured against gold ornaments. A borrower pledges their gold ornaments with the lender in exchange for funds. Therefore, it is a loan which is granted against a certain physical security of gold.
Gold loan is a new and emerging concept in the banking industry. There are a lot of people who own gold jewellery or ornaments which are lying idle at home or in the bank vault. A gold loan basically helps you unlock the value of these precious metals by allowing you to avail a loan against them. The process of availing a gold loan is rather simple. You can approach any bank or non-banking company which provides a gold loan with your ornaments. The bank or lender will carry out a valuation of the ornaments and check them for purity, weight, etc.
As the gold loans are backed by physical gold, the bankers are generally more than happy to give loan. Lending against gold is safe for the banks as they have the option to sell the gold in case you default, therefore banks generally disburse the loan in few hours. This is because the processing time is less.
Gold loans have a unique feature where the borrower has the option of paying just the interest part and the principal amount can be paid at the time of the closing of the loan.
As these are secured loans banks charge a lower interest rate compared to unsecured loan such as personal loan. The interest rates are generally in the range of 13 to 14% while personal loan generally starts with an interest rate of 15%. Also, if you attach another security as collateral, the gold loan interest rate can be reduced further.
Many NBFCs and banks don’t charge processing fees as these loans are given instantly in lieu of gold which is held as collateral with the lender.
You need the loan extremely urgently for a relatively short period of time.
If you want to avoid extensive paper work. Availing a Gold Loan requires only basic KYC documents.
If you lack a credit history or do not have a very high CIBIL score. Gold Loans do not undergo CIBIL checks.
If you possess gold jewellery that you are willing to hypothecate.
If you want to reduce you all-inclusive cost of borrowing. Gold Loans typically carry nil processing fees and pre-payment penalty, thus reducing the overall cost of loan.