What is a gold loan? 5 benefits of applying for one

Posted by neha sharma on May 27th, 2019

A gold loan is one of the popular ways to raise funds. This mode has become very popular in recent times with several lenders specializing in giving out gold loans.

What is a gold loan?

A gold loan is a loan where gold is hypothecated to a lender in exchange for funds. In this type of loan, the lender gives funds based on the value of gold hypothecated. Different lenders will accept different purities of gold i.e. 18 carat, 22 carat, 24 carats, so it is important to find out what purity is accepted before applying for a gold loan.

To get a loan against gold, you need to take your gold to the lender to get it valued. Once it is valued, the lender will calculate the amount that can be disbursed and deposit that into your account. The gold will however be kept with the lender under lock and key till the time the loan is completely repaid. The gold acts as a security for the loan.

The entire value of gold is not given out as a loan. Generally, the loan to value ratio for these types of loans ranges between 60% to 80% depending on the lender.

A gold loan far outranks other loans, especially unsecured ones. There are several benefits of a gold loan.

Here are 5 benefits of applying for a gold loan:

1. Low interest rate:

Since this loan is secured, the rate of interest is quite reasonable as compared to other unsecured loans. The affordable rate of interest makes it a popular choice for people. Since most Indian families have some gold, it can be hypothecated to raise funds at a reasonable rate of interest.

2. No prepayment fees:

This is the best advantage of a gold loan. These loans are short term loans that are given for up to 2 to 3 years. However, since there is no prepayment charge involved, the borrower can repay the loan at any time without any financial impact in the form of prepayment fees.

3. Flexible repayment options:

Some lenders may only charge interest on the loan and take repayment at the end of the tenure. Others may give the borrower the flexibility to fix installments and repayments. It is also possible to make part repayments and prepayments.

4. Minimal documentation:

A gold loan requires minimal documentation. To apply for gold loan, the only documents required are KYC documents and the actual gold that has to be hypothecated. No income documents are required. Your credit score is also not relevant to this loan. The KYC documents accepted are:

• Identity proof (PAN card, Passport, Aadhar Card, Voter Id, driving license)
• Address proof (Passport, Voter ID, Aadhar card, Driving License, Gas bill, Electricity bill, Telephone bill, Lease rental papers, Rental Agreement, Home loan papers, etc.)

5. Unconditional loan:

A loan against gold is unconditional. It can be used by the borrower for any purpose. This makes it akin to a personal loan, except the rate of interest is lower than personal loans.

To find out the monthly installments under a gold loan, you can use a gold loan EMI calculator which is available for free on lenders websites. This calculator uses a formula to bring you the installment amount instantly.