What are Gold loans and how it works?

Gold is considered as a precious metal which is popularly used for various purposes such as industrial, commercial or for investment purposes. In such a loan, the customer pledges their gold jewelry as a collateral with the lender. The lender, in turn, sanctions the loan amount based on its market value. Unlike other secured loans, there are no restrictions on the end usage of the funds availed. It is a very quick and easy way of fulfilling one’s financial needs. Be it a wedding, family vacation or your child's higher education. Financial institutions and NBFCs offer these loans at a lower rate of interest.

How do gold loans work?

The lender evaluates your gold and sanctions a loan amount after verifying the documents. As per the evaluation, the lender then sanctions you the loan amount. As per the loan agreement, you pay off the principal amount along with the interest and get the pledged gold articles back.

Who is eligible to apply for a gold loan?

To be eligible for a gold loan, you need to fall within the below-mentioned criteria:

  • Nature of Employment: Either a Salaried, Self-Employed Professional, Businessman, Farmer, or Trader.
  • Age Limit: To get a gold loan, your age limit should be in between 21 and 60 years.
  • Documents: You need to submit your KYC documents which are described in detail below.

What documents do I require to apply for gold loans?

As compared to other financing options, the documents required to avail gold loans are minimal. To get a gold loan, you would need a set of certain basic documents which are mentioned as below:

Identity Proof (Any one of the below):

  • PAN card
  • Aadhaar card

Current Address Proof (Any one of the below):

  • Aadhaar Card
  • Postpaid Bill/Landline Bill/ Water Bill/ Electricity Bill
  • Address Updated in Bank statement/Bank Passbook
  • Driving License
  • Voter ID
  • Passport
  • Rent Agreement (With Latest Owner's Electricity Bill)
  • Gas Bond Paper with the latest receipt
  • Credit Card Statement

Documents required for gold loan balance transfer:

  • Pledge card of the loan (It is a document which is taken from a customer at the time of doing a balance transfer. It states loan application number, the quantity of loan, lock-in period, and the loan amount)
  • One cancelled cheque (Any account)

What are the interest rates for gold loans?

Being a secured loan option, the rate of interest charged on the gold loans are comparatively lesser when compared to other secured loans. The rate of interest for different loan amount is given below:

If you opt for monthly re-payment, the rate of interest charged in that case is given below-

Loan Amount Rate of Interest
20k to 25k 1.65% per month
25k to 5 Lacs 1.33% per month
5 Lacs Above 0.89% per month

In the case of One-shot repayment, the rate of interest charged is 1.58%.

What is the gold loan tenure?

The tenure for gold loans is of 6 months and it will be renewed for another 6 months without any renewal charges. Since the tenure on gold loans is short, you must be sure of being able to pay the loan back on time. You may lose your pledged gold if you fail to repay it within the stipulated time.

How do lenders determine the gold loan amount?

Lenders evaluate the gold's purity and its weight before approving your loan application. Based on it, the market value of the gold is determined based on the current rate. Most of the lenders offer loans with a value of up to 75%-77% of the pledged gold’s market value. This is known as ‘Loan to Value Ratio’ (LTV). The Reserve Bank of India has also set LTV at 75%, at which all the lenders need to lend. For example, if your gold's value is Rs 1 lakh, the gold loan amount granted cannot be more than Rs. 75,000. Besides the Loan to value ratio, the loan amount also depends on various other factors such as tenure and the borrower’s repayment capacity.

How can you repay a gold loan?

You can repay your gold loan monthly in which you have to pay only interest every month on principal outstanding. Principal outstanding can be paid any time before 6 months. Apart from this, there is another option also to repay your gold loan amount i.e. One-shot repayment in which you need to pay the entire interest in one-shot any time before 6 months. In addition, you can also choose to pay the loan amount in easy EMIs as well.

Check here to know about the ways of making gold loan repayment.

To conclude...

Gold loans could be your best monetary solution when you require instant cash. The best part about these loans is that they are comparatively cheaper than other secured loans. In addition to this, they require very minimal documents and simple eligibility criteria to get the loan. Therefore, making them one of the best options when compared to others.