What is a gold loan and how does it work?

Posted by neha sharma on April 29th, 2019

A gold loan is a loan taken by hypothecating gold jewellery or gold biscuits with a financer to get funds. Gold finance is secured, which means that the gold is kept with the lender till the time the loan is completely paid off. This is a very popular mode of finance in India since most families have some gold which they can hypothecate when the need comes. Since many reputed financers offer gold finance, it has provided an affordable source of funds to people having gold with them.

Features of Gold Finance:

1. Loan Value:

The most important thing to note about gold finance is the loan to value. This is the percentage of the value of the security that is given out as a loan. In gold finance, the LTV is around 60% to 75% which means 60% to 75% of the value of the mortgaged gold is given out as a loan. If a lender gives a gold loan with a higher LTV, be sure to check the rate of interest and repayment tenure and compare it with other lenders.

2. Gold purity:

Most lenders will take any purity of gold i.e 18 karat, 22 karat, 24 karat. However, some lenders may have specific rules about the purity of gold that they accept for gold finance. It is better to get these instructions checked before applying for a gold loan.

3. Repayment period:

The repayment period for such loans is generally between 12 to 24 months. Most loans are given out for less than a year. Some lenders give the borrower the flexibility to decide the repayment tenure whereas others have fixed tenures.

4. Interest:

The interest rate on gold finance ranges between 10% to 30% depending on case to case. Each lender has a different rate of interest for gold loans. It also depends on the security that the borrower puts up.

5. Documents:

The documents required for a gold loan are:

• Fully filled application form
• Passport size photographs
• Identity proof (Passport, Driving License, Aadhar Card, Voter ID, PAN Card)
• Address proof (Passport, Driving License, Aadhar Card, Voter ID, Electricity bill, Telephone bill, Gas bill, ration card)

Most lenders do not require any other documents. Since the loan is secured, the lenders do not require income proof.

6. Eligibility criteria:

Most lenders do not have stringent eligibility criteria. The minimum and maximum age of the borrower is specified on the lenders websites. Apart from that, people of all ages and income groups can apply.

7. Prepayments:

It is possible to prepay a gold loan entirely without any extra charges. This makes it an excellent source of funds since the entire loan can be paid off once funds are arranged.

8. Default:

In case the repayments are late, penal interest will be charged. However, in case of default, the lender has a choice to auction off the gold. Sufficient notice will be given to the borrower before the gold is sold off to recover dues. Any excess recovery will be paid to the borrower.