Evaluating personal loan against gold

Sun Oct 28, 2012 11:37am IST

A customer tries gold bangles inside a jewellery showroom at Noida in Uttar Pradesh April 21, 2011. REUTERS/Parivartan Sharma/Files

A customer tries gold bangles inside a jewellery showroom at Noida in Uttar Pradesh April 21, 2011.

Credit: Reuters/Parivartan Sharma/Files

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Gold has a certain element of emotional value for all Indians. Taking personal loans against family gold had not been considered as a preferable option till late though the tradition of loan against gold had been in practice since centuries through unorganized money lenders. The value of gold has been on the rise for the last one century uninterrupted and is currently touching unprecedented heights. Thus it makes sense to utilize the power of the gold lying in lockers to avail loans instead of paying higher interest rates for pure personal loans. With banks and other financial institutions entering this space of late there has been a marked increase in personal loans against gold among the Indian middle class.

What is Personal Loan against Gold?

This is a simple modification of the age old practice by money lenders and has been institutionalized by the banks now. In this loan one has to deposit the household gold in form of jewelry with the bank or financing agency and get a loan up to 80% of the value of the gold deposited. The process also requires proper documentation like submission of identity proof, PAN card, address proof etc. The interest rate in this case is much lower than a pure personal loan as there is a security being provided by the burrower. The processing time for personal loans against gold is quite less as compared to other loans.

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How is it Different from a Conventional Personal Loan?

The difference lies in the various features of a personal loan against gold as discussed below:

This kind of a loan is basically a secured loan as the gold is deposited with the bank.

The repayment tenures of such loans are typically shorter extending to a maximum of 12 months in most cases.

The amount of the loan in such a case is dependant on the value of the gold being deposited rather than the repaying capacity of the individual which plays a lesser role here.

The interest rate of a personal loan against gold is lower than that of a pure personal loan and ranges around 11-15%.

There is some amount of risk which the financer takes depending on the movement of gold value in the interim period.

Key Benefits of Personal Loans against Gold

With this subtle difference from a conventional personal loan these kinds of loans have several inherent advantages.

The processing time is less and the requirement of documentation id also reduced.

Timely payment is ensured as most Indians relate emotionally to gold and would not like to lose their family jewelry through defaults.

The interest rates are favorable in case of personal loans against gold.

There are provisions wherein only the interest is required to be paid during the tenure and the principal can be paid back at the end of the loan period. This substantially reduces the burden on the burrower.

Taking a personal loan against gold lying idle in lockers is being considered by many people as a preferable option over other forms of loans available in the market.

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