Gold Loan — Unlocking Cash for Emergency Needs

Consider these two scenarios.

You quit your job to start a business and need an instant loan. It is unlikely that you will get a quick loan from banks. There are many banks that offer personal loans instantly. However, this facility is available to customers with high income levels and good credit history.
You just purchased an apartment using a home loan (phew!) and now need funds to furnish your dream home without much hassle.

What do you do? Well, gold loans can come to your rescue. Under gold loans, you give gold as collateral to the financial institutions and they offer you credit. Since the security offered can be easily liquidated in case of default, banks and NBFCs offer these loans with relative ease. Both banks and NBFCs offer gold loans.

You don’t have to sell the household gold. You can take it back from the bank after you repay the loan completely. Given the fondness Indian households have for gold, this is one asset you can rely on to generate funds in cases of emergency.

I had discussed about loan against PPF (Public Provident Fund) in one of my previous posts. There were limitations in terms of amount and availability. Gold loans do not have such restrictions. If you have gold in house, you can walk into bank or NBFC branch with gold and walk out with a loan. To be honest, gold loans may not be exactly instant. But some NBFCs claim to provide loans in a few minutes. In this post, I will important aspects of gold loans that you need to be aware of.

Tenor for Gold Loans

Gold loans are short term loans. As per RBI guidelines, the tenor is limited to 1 year (in case of non-agriculture use). Manappuram Finance and Muthoot Finance offer gold for maximum tenor of 12 months. ICICI Bank offers gold loan up to a tenor of 12 months. Axis Bank offers gold loans for a tenor up to 36 months.

Since the loans are short term, you must be sure that you can repay the loan in this short term. Hence, you have to be confident of your cash flows before you take this loan. If you default, your gold will be liquidated to square off the loan. There is no end-use restriction for gold loans. You can use the loan amount for any purpose.

How Much Loan Can I Get against My Gold?

Reserve Bank of India has capped Loan-to-Value (LTV) for gold loans to 75% of the gold value for banks and NBFCs. For instance, you deposit 100gm of gold as security. Prevailing gold price is Rs 2,500 per gram. Total value of security (i.e., gold) is Rs 2.5 lacs. Against this security, you will get maximum loan of 75% of Rs 2.5 lacs i.e. Rs 1.87 lacs. Please understand this is the maximum loan amount. Individual financial institutions may have a lower cap (say 60-65%) due to internal credit policies.

And this is a fair call. Banks/NBFCs offer gold loans swiftly without much diligence about repayment ability of the borrower. They need some cushion for interest default too. Moreover, gold price is volatile. They need to guard against fall in gold prices too.

For the purpose of gold price, 30 day average of the closing price of 22 carat gold (as quoted by Bombay Bullion Association) is considered. If the purity of gold offered as collateral is less than 22 carats, the gold shall be valued proportionately.

Do understand only the value of gold is considered. Hence, if you are depositing gold jewellery as security, ‘making charges’ will be ignored and only the value of gold will be considered. Value of studded diamonds and stones will also be ignored. In other words, the weight of stones and diamonds will be deducted from the weight of jewellery to arrive at eligible gold weight. Apart from limits set by RBI, banks and NBFCs have their internal maximum and minimum limits on gold loans.

What Are the Interest Rates on Offer?

Interest rate will vary across banks and NBFCs. The level of interest rate will depend on the tenor, the loan amount, LTV and of course the base lending rate. I checked some of the schemes from NBFCs. LTV (Loan to value) and interest rates were inversely related. For instance, in certain cases, LTV was high i.e. you can get higher loan for your gold. However, to compensate for the risk of default, borrowers have to pay higher interest rate. On the other hand, a loan scheme with lower LTV will be offered at a lower interest rate.

Mode of Repayment

Repayment structure depends on the lender. Mostly, banks and NBFCs permit repayments through EMI (equated monthly installments).

With a few banks and NBFCs, borrowers may also get an option to make bullet repayment at the end of loan term. In this case, borrowers will have to pay interest regularly. Only the principal amount can be paid in a bullet payment. This scheme would help borrowers with near-term cash flow issues.

A bullet loan is a interest-only loan where the payment of the entire principal of the loan is due at the end of the loan term.

Illustration

Consider a Gold Loan of Rs 2 lakhs with tenor of 12 months at 14.5% interest rate using EMI and Bullet Repayment Schemes. Here’s a comparison of payments under the two schemes.

Monthly Payment	EMI Scheme	Bullet Repayment
Month 1	18005	2417
Month 2	18005	2417
Month 3	18005	2417
Month 4	18005	2417
Month 5	18005	2417
Month 6	18005	2417
Month 6	18005	2417
Month 7	18005	2417
Month 8	18005	2417
Month 9	18005	2417
Month 10	18005	2417
Month 11	18005	2417
Month 12	18005	2417
Bullet Payment (End of Month 12)		2,00,000
Total of all Payments	2,16,054	2,29,004

Do I Get My Jewellery Back?

Yes, you get your jewellery back if you repay the loan on time. However, if you don’t pay on time, your gold (or jewellery) offered as security can be auctioned.

Benefits of Gold Loans

You don’t need to prove your repayment ability to get a gold loan. No salary or income proofs are typically required. Therefore, even unemployed and non-working people can take this loan.
Lenders do not insist on too much documentation. In most cases, Identity and address proof is enough.
Since the loan is secured, the interest rate is lower than personal loans.
Processing time is quite low. Some NBFCs in fact promise to offer loan within a few minutes. Those in urgent need of funds can opt for this route.
There is no need for guarantor or introducer for availing gold loans.

Charges Associated with These Loans

Processing Fee: Like with other loans, this fee can be negotiated and sometimes can be waived off.
Valuation Fee: Some financial institutions may charge a small fee for valuation of gold. This is typically paid to the third party. In case of in-house valuers, this charge will most likely be waived off.
Pre-payment / Late payment penalty: There may be penalty in a case of pre-payment of loan and delay in payment of interest.

Features	State Bank of India	ICICI Bank	Muthoot Finance	Manappuram Finance
Minimum Tenor	3 months	6 months	3 months	1 month
Maximum Tenor	12 months	12 months	12 months	12 months
Minimum Loan Amount	10,000	10,000	1,500	1,000
Maximum Loan Amount	2,000,000	1,500,000	10,000,000	10,000,000
Interest Rate	2.5% above base rate	10%-16.5%	16-21%	15-24%
Prepayment Penalty	1% of Principal O/S	1% of Principal O/S	Nil	Nil
Processing Fee	0.51%	1%	Up to Rs 500	Rs 10
*I have relied on information from the websites of respective banks and NBFCs and other independent sources. Information on the website may be outdated. I have used discretion in such cases. For better accurate terms and conditions, contact respective banks and NBFCs.

It is easy to see banks offer gold loans at much lower interest rates as compared to NBFCs. However, as I understand, NBFCs are much quicker and exercise less discretion in offering loans. For instance, on SBI website, it is mentioned that the gold loan is available to only those with steady source of income.

Conclusion

Gold loans can be a quick source of funds in cases of emergency. A lot of borrowers who can find it difficult to access conventional loans can borrow against household gold. Given the fondness for gold in Indian households, this ensures a number of households have quick access to funds in cases of emergency or even otherwise.

As with any kind of debt, do not borrow unless you are sure you can make the repayment. Just because the loan is easily available does not mean you must take the loan. With the tenor limited to 1 year in most cases, these loans can be only be used to tide over short term fund requirement. Do not use the facility to manage a long term cash flow crisis. In case of long term crisis, you are better off selling gold rather than taking loan against it. You will at least save on interest cost. And it can get worse. Making charges of jewellery and value of studded stones or diamonds are not considered while deciding loan eligibility. In case, you cannot repay the loan, the gold (or gold jewellery) may be auctioned. Auctions may not fetch good price for your jewellery. So, you may end losing more than just the loan outstanding.

To our families, gold is not just a financial asset. There is an emotional value attached too. For many women, household gold is a great source of empowerment. Facility of gold loans adds to utility of gold in your investment portfolio. Gold loans can be a good source of short term cash, especially in cases of emergency. However, in my opinion, any unnecessary debt should be avoided and gold loan is no different. Exercise discretion.