Gold Loan - how does that work ?

You've just seen an apartment you would really like to book, but don't have enough cash for the down payment. Where would you raise the cash? If you're thinking personal loan, do consider a loan against your jewellery first.

Loans against jewellery, which several finance companies and banks offer today, allow you to make use of the gold and jewellery you have safely tucked away in your home or in a bank locker. If you're in a bind, taking out a loan against jewellery may prove to be the quickest route to raising cash.

These loans come with processing time of less than a day, virtually no documentation and flexible payment options. You don't even have to state the purpose for which the loan is required.

How to get it

The mechanics of a jewellery loan are simple enough. You pledge your jewellery with the bank, which then sanctions loans based on the value of your jewellery. When you repay the loan, you reclaim your jewellery. Application and sanction of the loan can be completed in a single day, allowing immediate access to the cash.

Not all banks offer loans against gold. But among those who do are Indian Bank, Axis Bank, Canara Bank, HDFC Bank and Syndicate Bank. Financial companies such as Manappuram Finance and Muthoot Finance specialise in such loans.

Gold loans are typically much cheaper than personal loans or loans you may take on your credit card.

Interest rates range from 12 to 15 per cent per year. Rates vary slightly between banks; for instance, Indian Bank charges a 13.25 per cent interest rate while Axis Bank charges less than 12 per cent. Muthoot Finance has rates from 1 per cent a month, while it is 0.96 per cent a month at Manappuram Finance.

Gold is accepted in the form of jewellery or as coins by these lenders. If it is in the form of ornaments, only the gold component in the ornament will be considered.

No value is ascribed for gems or stones, should there be any in the jewellery. Silver, platinum or any other metal cannot be pledged, either.

You also cannot hope to get a loan for the full value of your jewellery (or the cost at which you bought it). First, the jewellery will be checked for purity and the lender will arrive at a value based on what the internal appraiser says.

Then, loans may be provided for 70 to 85 per cent of the value of this gold, while others specify the rate per gram at which they provide loans. This varies from time to time according to gold price changes.

The quantum of loan you can avail has minimum and maximum limits. HDFC Bank, for instance, will consider a minimum of seven sovereigns – that is 56 grams – of gold for loans. Other banks specify minimum loan amount rather than grams.

Maximum limits vary wildly; Axis Bank has an upper limit of Rs 2,00,000, while HDFC Bank caps loans at Rs 10,00,000. Finance institutes such as Manappuram Finance and Muthoot Finance don't specify minimum limits, though the former has a ceiling of Rs 1 crore.

Payments and tenures

Besides limiting loan amounts and value of gold, banks make gold loans for a short period. Repayment periods range from six months to two years. Jewellery loans do not require regular EMI payments.

As a rule, payments need to be made at the end of the tenure, although they can also be made at any time with partial payment options during the period of the loan. Some banks, however, require regular servicing of the interest if not the principal. Until the entire sum is repaid, the gold will be held by the lender.

Loans against gold hold an edge over other loans due to the ease and speed of processing. Banks have appraisers at select branches who value the gold, regardless of any valuation you may have previously done. Based on that appraisal, loan amounts are determined.

Sanctioning the loan and transfer of the amount is then a simple process that takes less than an hour in most cases. Note that, for immediate access to the loan amount, it is beneficial to have an account with the bank. Amounts given through cheques can be used only after the cheque is cleared, which take at least a couple of days.

Documentation is the next area where jewel loans score. All that is required are proofs of identification and address. Income levels, bank statements, salary slips and others that are required for most other loans are not needed here. This contributes to the minimal process time.

Penalties

Payment of loans in full before the end of the tenure does not trigger any penalty. However, should you fail to repay even at the close of the loan period, interest will be charged at a higher rate, usually 2 per cent above the loan rate.

The gold will be auctioned off by the bank, but the amount of sale proceeds that would come to you would depend on the terms of the agreement you've signed.

The jewellery pledged will be held by the bank till the time the loan is entirely repaid; part payments do not lead to partial release of the jewellery.

Some banks require that you hold an account before applying for a jewellery loan. Also, application and processing of these loans are not carried out at all branches. Should the price of gold fall drastically during the period of the loan, to the extent that it fails to cover the amount outstanding, some banks require payment of the difference. Again, this depends on the terms of the loan agreement. However, given the relatively short term of gold loans, a very steep fall in gold prices may not be likely.

via BL