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What Is Gold Loan and How Does It Work?

Traditionally, buying gold is one of India’s most common choices for investment. However, your gold ornaments will also help you get a loan at times of need, apart from being an enticing investment opportunity. To explain what this loan is and how it works, check out this article.

Life is full of uncertainties and one such insecurity that evades almost no person is financial difficulties. Loans are one of the safest options to handle financial requirements. However, though several different forms of loans are now available, a Gold Loan is one of the better choices at those times of need to satisfy financial needs. Though gold has always been a common choice for investment in India, loan on gold adds to its popularity. Please take a look at this writeup to learn about gold loans and its mechanism.

What’s a gold loan?

There are two forms of loans, secured and unsecured. Unsecured loans are issued without any collateral, such as a personal loan whereas secured loans such as gold loans are given on your gold ornaments by keeping it as collateral. If the lender has insurance or collateral on this debt, it is considered to be cheaper than an unsecured loan. So when you keep your gold ornaments as leverage to borrow money from a lender, it’s a gold loan. The sum sanctioned as the loan amount is a portion of the gold deposited.

Gold loan interest rate and its tenure

Gold loans (secured) are usually cheaper than unsecured loans. The gold loan interest rate can range from 10 percent to 16 percent or higher, depending on the lender you choose. Generally, these loans are given for a period of 6 months to 12 months. Repay the full loan on time, and at the time of ending the loan, you will get your gold ornaments back in the same condition as when you first deposited them.

Necessary documentation to take a Gold Loan

You can take the gold loan/gm of the articles you own. The paperwork requirements of such loans are low, as opposed to most other forms of loans. Most banks only ask you to submit proof of identity, proof of address and two photos. As you carry your gold to the lender to keep as insurance, the lender does not take into account considerations such as your credit score, salary, age, etc.

How to get the lowest gold loan interest rate?

  • Special deals: Often review existing offers and interest rates provided by different banks, as banks regularly run special schemes.
  • Compare bank deals for different loan volumes; usually at higher loan amounts, banks offer low-interest rates and vice versa. In comparison, the interest rate charged by NBFCs is generally higher since they provide limited loan amounts with adjustable and quick service.
  • Kind of loan received: Gold loans for agricultural purposes are typically offered at lower interest rates. Similarly, you will be forced to pay a high-interest rate if you intend to use an overdraft facility for gold.
  • Loan to Value Ratio: The greater the ratio of loan and value, the higher the interest rate paid. In an attempt to provide relief to gold loan borrowers, banks will lend up to 90 percent of gold as a loan, according to the latest guidelines of RBI.
  • Current bank account holder: Often, gold loans are given to the existing customers of the bank at a low-interest rate. If you have a savings account, an FD or a loan account, you will be eligible to do that.

How do gold loans work?

The whole gold loan process is pretty similar to other guaranteed loans. In this, along with the appropriate collection of paperwork, you take your gold products to a lender. The lender evaluates the articles of gold and verifies the papers presented. The lender sanctions the loan sum as per the estimates. You pay off the principal sum along with the interest amount as per the loan arrangement and get the promised gold products back.

How do you store and manage the pledged gold?

How the gold jewellery is stored can vary from lender to lender, but considerable care is taken to hold the gold jewellery properly. The gold is kept under strict protection until the loan is granted and disbursed. For safety purposes, lenders use automated vaults with motion detectors and CCTVs. The gold pledged by you is also insured by specific lenders. These safeguards are for theft. In the event of a robbery, you still get back an amount equal to the market value of the gold.

Conclusion: In general, gold lending is relatively less expensive than personal loans. A gold loan will support you if you have an urgent financial need because the procedure is smoother than most loans.

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