Representative image of jewellery.
Credit: DH Photo
Gold, often perceived as a symbol of prosperity and wealth in many cultures, has been deeply rooted in our traditions for centuries. Apart from its cultural significance, gold has an inherent monetary value that has made it a reliable asset for financial security. One of the primary avenues through which gold aids in monetary benefits is via gold loans. In this article, we aim to decode gold loans and understand their credit value.
What is a gold loan?
Gold loan (also called loan against gold) is a secured loan taken by the borrower from a lender by pledging their gold articles (within a range of 18-24 carats) as collateral. Banks and other financial institutions offer this loan by keeping the gold as collateral until the loan amount is repaid. It’s a secured loan, where gold acts as a guarantee, making it relatively easier and faster to obtain compared to unsecured loans.
The credit value of gold
Instant liquidity: Gold, unlike other assets, can be quickly liquidated. This means it can be immediately converted into cash or credit. When you pledge gold for a loan, institutions usually process the loan rapidly, often within a few hours, given its high liquidity.
Flexible loan amount: The loan amount is generally a percentage of the gold’s value. With gold prices generally on an upward trajectory, the credit value of your gold assets can increase over time. Regularly evaluating the value of your gold can give you insights into how much credit it can fetch.
Lower interest rates: Since gold loans are secured, the risk for lenders is comparatively lower. This often translates to lower interest rates compared to unsecured loans. However, the rate can vary depending on the lending institution and the loan-to-value ratio.
Credit score benefits: For individuals without a credit history or a lower credit score, gold loans can be a saviour. Since the loan is secured against gold, banks might be more willing to lend even if you don’t have a robust credit history. Timely repayment of a gold loan can also positively impact your credit score.
Flexible repayment options: Many institutions offer various repayment options for gold loans. Borrowers can opt for regular EMI payments or pay the interest upfront and the principal amount at the end of the loan tenure. Such flexibility can be beneficial in managing finances more effectively.
Things to keep in mind
While gold loans offer numerous advantages, it’s crucial to be aware of certain aspects:
Fluctuating gold prices: Gold prices are subject to market fluctuations. A significant dip in prices could mean lenders asking for additional collateral or paying a higher differential amount.
Loan-to-value ratio: Lenders don’t offer loans on the full value of gold. They provide a certain percentage of the gold’s value, which can range between 60% to 90%, depending on the institution and prevailing regulations.
Safety of the gold: Ensure that the lender has proper security measures in place to safeguard your gold.
In conclusion, gold is not just a precious metal to be adorned or stored in lockers for years. Its inherent credit value can be harnessed effectively, especially during financial crunches. However, like all financial products, it’s imperative to understand the terms and conditions fully and ensure you’re getting the best deal. With informed decisions, gold can indeed be more than just a shiny asset; it can be a golden ticket to financial security.
(The writer is Sr Director and Head of Consumer Interactive (Direct-To-Consumer) India, TransUnion CIBIL)