For generations, Indians have been the biggest consumers of gold in the world, next to China. Collectively, Indian consumers hold the largest stack of this shiny precious metal in the world. In India, beyond ornamental usage, gold is seen as a safety net. It acts as an insurance policy and is often used to meet emergencies.
With the second wave of the Covid-19 pandemic unleashing massive economic devastation, more Indians seek the refuge of gold loans to raise money to meet medical expenses and other emergencies.
Gold Loans: The Preferred Choice during an Emergency
The heightened uncertainty due to the second wave of the pandemic and increased risk aversion by lenders have made desperate borrowers choose gold loans as their preferred method of borrowing in 2021, just like in 2020.
The second wave of the pandemic is more devastating than the previous year, causing most states to go into lockdowns this year as well. With the lockdowns threatening livelihoods of daily wage workers, small business owners and medical expenses rising, more and more Indians are looking at loans to meet emergency cash needs.
With every household in the country owning gold jewellery, gold loans have emerged as the popular option to access instant loans.
Growth of Gold Loans in India during the Pandemic
The national lockdown announced in April 2020 brought the whole economy to a standstill. Millions of employees engaged in the informal sectors, and thousands of small businesses lost their livelihood. With jobs drying up, millions of Indians had no other go but to dip into their gold reserves to meet emergency cash needs.
Industry estimates state that gold loans at NBFCs grew by 15% in the last year. The outstanding gold loan amount increased by a whopping 82% from Rs. 33,303 crores in March 2020 to Rs. 60,464 crores in March 2021.
Also, the RBI had relaxed the LTV value to 90% from 70%, thereby increasing the available loan amount. This was another added advantage for borrowers. This dispensation ended on 31st March 2021, and currently, the maximum LTV stands at 70%.
Why are gold loans the popular choice during an emergency?
Today, there are multiple credit facilities like personal loans, instant online loans, credit cards to raise cash immediately. However, these facilities require a good credit score, income proof and other eligibility criteria. This is where gold loans emerge as the better choice. Gold loans are quick, require very minimal documentation and have easy eligibility norms.
Here are the top reasons why Indian borrowers resort to gold loans during an emergency:
- Speedy Processing and Instant Disbursal
Gold loans are readily available and are often processed within a few hours. In some cases, customers can walk into a gold loan company (an NBFC) with their physical gold and walk out with the loan amount within 30 minutes. This is highly helpful during an emergency, where the time available to raise cash is minimal.
Once the borrower submits the loan application form, along with the physical gold as security, the loan amount is approved and disbursed within a few hours—no waiting for weeks or months for the loan approval. The loan amount is credited directly to the applicant’s bank account, and he/she can use it instantly to meet emergency cash needs.
- Lower Interest Rates
Gold loans have a lower interest rate than personal loans and credit cards as they are secured loans. Since the borrower pledges the physical gold ornaments as collateral, it reduces the risk borne by the lender. In the worst case, the lender fails to repay the loan on time; the lender can pledge the gold jewellery to recover the loan amount. Hence, the prevailing interest rates of gold loans are lower when compared to other instant credit facilities like a personal loan or credit card.
The lower interest rate reduces the overall loan burden for the borrower, thus preventing him from falling into a debt trap.
- Higher Loan Amount
This is another massive benefit of a gold loan. The loan amount sanctioned depends on the value of the pledged gold ornaments. Compare this with a personal loan, where the maximum loan amount depends on the borrower’s income. For example, a borrower with an Rs. 20,000 monthly salary may not qualify for a personal loan of Rs. 8 lakhs. However, the same borrower can quickly get a gold loan for Rs. 7.5 lakhs by pledging gold ornaments worth Rs. 10 lakhs.
Currently, the maximum gold loan amount that is sanctioned is 75% of the gold value. This LTV (Loan-to-value) ranges from 65% to 75%, depending on the lender.
- Convenient Repayment Options
Gold loans have convenient repayment options:
- Regular EMI – You can repay the borrowed amount + interest as monthly EMIs
- Interest as EMIs – Repay only the interest as EMI during the loan tenure and pay the principal at the end of loan closure
- Upfront Interest – Here, you repay the whole interest at the time of loan sanction and repay the principal at the end of the loan tenure.
- One-Shot Repayment – Or repay the whole loan amount along with interest in one shot at the end of the loan tenure
Most lenders offer easy repayment options online, making the loan repayment hassle-free and convenient.
- Super Simple Eligibility Requirements
The biggest draw of gold loans is that you don’t have to submit income proof or have a high credit score to qualify for a gold loan. This is a huge benefit to borrowers employed in informal sectors and the lower sections of the economy.
If you’re looking for an instant loan that doesn’t require income proof or supporting documentation, gold loans are your best bet.
Tips to Keep in Mind before Applying for Gold Loans
If you’re seeking a gold loan, make sure to read the tips mentioned below before applying:
- Banks Vs. NBFCs
Both banks and NBFCs offer gold loans, but there are differences.
| Banks | NBFCs |
| Lower interest rates | Interest rates are higher than banks |
| Lower loan amount | Higher loan amount as they generally value your gold at a higher price compared to banks |
| The process might take a few days since not all banks have an in-house valuer to estimate the value of the pledged gold and check its purity | Speedy disbursal, since gold loan NBFCs have an in-house valuer who checks the weight, purity of your gold instantly |
Weigh these pros and cons to decide which is the better choice for you.
- Gold Bars are not accepted for Gold Loans
Both banks and NBFCs do not accept gold bars. Gold ornaments are the preferred choice for gold loans.
- Most lenders require the gold to be at least 18 carats purity. Gold jewellery below this purity is not accepted.
- Also, note that lenders value only the gold in the ornament. Diamonds, rubies and other precious stones are not included in the value.
- In the case of gold coins, most lenders require the coin to have a higher purity value.
- Also, most lenders do not accept gold coins above 50 grams.
- Consider the Different Charges
Most lenders levy a slew of charges like valuation charges, processing fees, prepayment charges etc. So, make sure to consider all these charges while comparing gold loan lenders.
- Be aware of the Repayment Plan
As mentioned above, gold loans have various repayment plans. Make sure that you choose the right repayment plan that works for you. Some lenders deduct the interest charges from the loan amount before disbursing it. For example, if you’re sanctioned a gold loan for Rs. 1 lakh and the interest charges are Rs. 8000, then the lender offers you only Rs. 92,000. So, be aware of the various repayment plans and choose the best one that fits your monthly budget and financial capability.
- Non-Payment of Gold Loans
If you’re unable to repay the gold loan as per the repayment schedule, the lender has the right to auction the pledged ornaments to raise the money. If the gold price falls and the sale fails to cover the outstanding loan amount, you may be asked to pledge additional gold ornaments.
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Wrapping Up
A gold loan is an easy way to raise cash immediately during an emergency. It can help you raise cash for medical emergencies and other unavoidable expenses. However, it should be used only for temporary cash-flow problems. Don’t use a gold loan to fund a large avoidable expense like purchasing a home or buying a car. When taking a gold loan, keep the tenure as short as possible and repay the loan on time to avoid losing your family heirlooms.
