Akshay Tritiya is one of the many festivals in India associated with purchase of gold. Traditionally, there are other festivals too, which are associated with purchase of gold, such as Diwali, Durga Puja, and Karva Chauth, among others.
Gold has a reputation as a safe haven from an investment point of view. But gold is also ingrained in our culture as a symbol of status and wealth, and an investment for a rainy day. Here are a few things to keep in mind before taking a gold loan
Akshay Tritiya is one of the many festivals in India associated with purchase of gold. Traditionally, there are other festivals too, which are associated with purchase of gold, such as Diwali, Durga Puja, and Karva Chauth, among others.
According to a World Gold Council report published in January 2023, India is the second-largest gold jewellery market in the world.
As an asset class, gold has shown a remarkable rise in the last few decades. This also makes it a good investment class for taking a gold loan in an emergency.
Says Prithviraj Kothari, managing director and CEO, RiddhiSiddhi Bullions Limited (RSBL): “Gold as an asset class has risen 10 times in the last 20 years from Rs 6,000 per 10 gm to Rs 60,000 per 10 gm. Gold is highly liquid all over the world, so when there is liquidity crunch, people often consider selling or leasing gold. But the best option is to take a gold loan, as you retain the ownership of gold after repayment of principal and interest after some period of time.”
A gold loan involves minimal paperwork. Once the ‘know your customer’ (KYC) has been complied with, the loan is released.
But to get a fair value for your gold, here are a few things you must keep in mind.
Pick An Authentic Lender
Chose a regulated and trusted lender who will offer you get a fair value for your jewellery, and also to avoid any hiccups in the processing and while taking back the gold after repayment. Banks and non-banking financial companies (NBFCs) with a larger presence are more reliable options than your local neighbourhood jeweller.
Interest Rate And Other Charges
You can select the lender based on the rate of interest they are charging, the processing fee, or any other charges, their approachability, the loan to value (LTV), and the ease of loan processing.
Says Kothari, “Based on your risk profile, lenders determine the interest rate of the gold loan. Depending on your risk assessment, the rates could range from 7-25 per cent.”
For instance, Axis Bank charges approximately 9.5-9.75 per cent on gold loan and generally gives a LTV of 75 per cent. The LTV ratio depends on the market value and liquidity of your gold asset. Simply put, if the lender determines the LTV at 75 per cent and your jewellery’s value is Rs 1 lakh, you will get Rs 75,000 against your gold.
Gold Valuation
When you pledge your gold for a loan, you must ensure that it is valued properly. The amount you will get in exchange for the gold will be the market rate on that day. The lender will evaluate your gold based on its purity measured in carats. The higher the purity, the greater will be the valuation of the gold. A 24-carat gold could be of more value than an 18-carat gold jewellery. Also, keep in mind that any studded precious or semi-precious stones will not be considered under valuation.
Repayment Option
You must check the repayment schedule before taking the loan and choose what is best for you. You can check the repayment options, prepayment charges, and the minimum period after which you are allowed to do a prepayment.
Usually, banks have repayment options in the form of regular equated monthly instalment (EMIs) and upfront interest repayment. In the regular EMI option, one has to pay the month-on-month principal plus interest during the chosen loan tenure. In the upfront interest option, one has to pay the total interest on the loan upfront and the remaining loan amount at the end of the tenure. Sometimes, banks and NBFCs also offer interest-only payment every month, as in an overdraft facility and full principal payment at the end.
Repayment
It is important to know the procedure that the lender follows. While the rate of interest on gold loans is lower than on other loans, and banks typically sanction them within 30-45 minutes of the paperwork, in the event you fail to pay back on time, the lender might auction your gold.
The important thing to keep in mind is that it is an asset as well as an investment for a rainy day which also carries emotional value for you.