5 things you need to know before applying for a gold loan

Gold is not only an ornament for decoration but one of the important financial assets against uncertainty and inflation. It makes getting a loan hassle-free. You can use your gold as collateral to break borrowing barriers due to your income or bad credit rating. In India, gold is a popular asset class among households as it is exchanged hands in several traditional ceremonies across the country. However, uncertainties like the Covid-19 pandemic and other emergencies make us realize the importance of gold and how it can help you solve your liquidity problems.

You can mortgage your gold to financial institutions whenever you need money urgently. It helps you borrow money and recover your asset by repaying the loan. The Reserve Bank of India (RBI) had to increase the LTV ratio on gold loans to 90% from 75% until April 1, 2021, to help people get higher value on their gold if they ask gold loans in case of financial difficulties.

Adhil Shetty, CEO of Bankbazaar, explains: “As gold prices rise, gold loans become a viable option for people looking for cash. If gold prices fall, the borrower must pledge more gold or make up for the shortfall. If a borrower defaults on their loan, the lender can sell the pledged gold to recover the shortfall.

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If you’re also considering applying for a gold loan, here’s what you need to know and do.

Choose your lender carefully

It’s important to check out several institutions and compare their services and security to make sure your gold stays safe until you get it back. Also, the ease with which your loan is approved and other services you may need during the term of your loan are important factors to consider before finalizing your lender.

Gold loan amount

The Loan to Value (LTV) ratio is capped at 75% by the RBI. Besides the LTV ratio, your loan amount depends on the purity and valuation of your gold; if the purity of your gold is good, the chances of getting a higher loan amount increase.

The term of the loan

The duration of the gold loan is generally less than that of other types of loans. It is for a short term, usually one year to 36 months.

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Interest rate

Although it varies from lender to lender, the interest on the gold loan can vary between 7.40% and 14.50%. It may be higher or lower depending on the purity of your gold and other requirements lenders may have.

Refund clauses and other fees

The terms and conditions of gold loans are often different from one lender to another. Some lenders may accept the Equivalent Monthly Installment (EMI) as a regular loan, and others may require you to pay the interest up front and the principal later. Many lenders also allow you to pay both interest and principal. It is good to know well in advance the prepayment fees, processing fees and other additional fees that you may be required to pay before signing the loan agreement.

These tips will help you make a wise decision when opting for a gold loan. It is good to compare the interest rates of the different establishments and to choose the duration to repay your loan easily without delay or default in payment.

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