In our previous post, we discussed how an overdraft facility can score over personal loans (term loans) if your cashflow shortfalls are intermittent and short lived. An overdraft facility can reduce your interest liability compared to a personal loan for such use cases.
Now, an overdraft facility can come in multiple variants. An overdraft facility can be both secured and unsecured. It is fair to expect that an unsecured OD facility will cost you more than a secured facility. Hence, if you want to keep your cost low, you can request your bank for a secured OD facility.
The banks usually offer overdraft facility against bank fixed deposits, property, or gold. Since an FD is the most liquid security, an OD against a bank FD is the easiest and the quickest to get. An OD against property, due to the nature of security, may take longer. An OD against gold jewellery may fall somewhere in between. Not all banks may offer an OD facility against gold though. Hence, you may have to check with your bank.
Still, in this post, we focus on the gold overdraft facility.
Gold Overdraft Facility
Such a facility would be offered in line with RBI Master Directions for Gold advances.
If the loan/OD facility is for business needs (an income-generating loan), the loan amount (OD facility amount) would depend on the repayment ability of your business (cashflows) and NOT on the value of the collateral. But yes, gold collateral can lower the interest rate on your OD facility.
For a consumption loan (personal loan), the loan amount will depend on the value of the collateral.
Additionally, please note gold loan/OD facility is offered only against gold jewellery. You cannot take loan/OD facility against gold bars and biscuits. You can borrow against gold coins but only up to 50 gms of gold coins.
Gold OD Facility: A Hack for Bank Lockers
I read an interesting article on Livemint about how you can use Gold overdraft as a hack for bank lockers.
We know it is not easy to get bank lockers. There is a long waitlist, and the banks would ask you to do 10 things before offering you locker facility.
Hence, instead of requesting the bank for a locker, you can ask them to offer you a gold overdraft facility. To offer OD facility against your gold, they will take your gold jewellery as collateral and keep it safe. Isn’t that your aim with bank lockers too? And if you do not make any withdrawal from the OD facility, you do not incur any interest cost either.
A few benefits of a gold overdraft facility against a bank locker.
- Since OD is a credit facility, there is almost no waitlist.
- The bank would likely not ask you to open bank FD or purchase expensive insurance products.
- With a bank locker, the bank is not aware of the contents of the locker, and the locker cost is also not dependent on the value of its contents. Hence, the bank’s liability is limited in case there is theft, fire, or if your locker contents are destroyed in a natural calamity. In case of the gold OD facility, the bank insures your gold jewellery. Hence, you have greater safety. Please understand your gold jewellery is the cost of gold + making charges. As I understand, the bank insures only the value of gold. So, you do not have complete protection.
There Is No Free Lunch
For the benefit of the bank keeping your gold safe (if that’s your aim with gold overdraft facility), you must incur the associated OD charges. If an OD cost component (say processing fee) is a percentage to the amount of collateral (loan amount), then this cost can get steep. And you must incur this cost on every OD renewal.
In contrast, a bank locker costs you only a few thousand rupees per annum.
A Few Points to Consider
- The bank only takes gold jewellery (and not biscuits or bars) as collateral. The bank can accept only up to 50 gms of gold coins as collateral. Hence, if you own gold bars/biscuits, gold overdraft scheme is a non-starter for you.
- Gold coins, bars, or biscuits that are just a store of wealth. Does not matter much whether these gold items are kept with you or with the bank. However, you can wear gold jewellery. If the jewellery is in a locker, you can take it out and use it anytime. However, once you offer the gold jewellery to the bank as collateral, you will get it back only after you have repaid the loan.
- You don’t use a locker just for keeping your gold jewellery. You may keep documents or other valuable items. A gold overdraft facility won’t help you beyond keeping your gold jewellery safe.
Personally, for me, this is too complicated. Taking an OD facility just to keep my gold safe. However, everyone thinks differently. If you see merit in this approach, you can try this out.
As far as an OD facility against gold jewellery is concerned, you can opt for such a facility if your cashflow situation demands so. At the same time, an OD facility is also a loan. Do not borrow what you can’t prepay easily.