Loan against gold: How it works

Our lives are filled with needs, and very often to fulfil them we may require instant funds. The answer to such financial requirement may not always be in personal loans. Loan against gold is a quick and hassle free finance option requiring minimal documentation. So instead of keeping that gold jewellery, coins, bars or biscuits lying ideal in your locker, you sure could use them to meet those cash contingencies.
 
Loan against gold: How does it work?

Loan against gold is a very simple concept. By pledging your gold ornaments, coins, biscuits, bars etc. the lender provides you with liquidity at a predetermined rate of interest. Loans are sanctioned after scrutiny of basic documents and satisfactory evaluation of the gold pledged.

The amount is then disbursed in the form of cash, demand draft or sometimes even an account transfer. The whole disbursal process is quicker than personal loans, with some lenders even promising disbursal in five minutes.

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Key features

• You could avail a loan of up to 80 per cent to 90 per cent of the gold value, depending on the lender
• You need not have to sell your gold for contingencies. On repayment of the loan, your gold is back with you
• The entire loan may be repaid whenever it is possible. There are no charges for pre-closing the loans
• Short term in nature varying from three months to three year
• Individuals of low income group or from rural/lower economic strata could also avail of this loan conveniently who may otherwise not qualify for traditional loans

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Evaluation of gold

The method followed to evaluate the gold pledged, may slightly vary from lender to lender. But in general practise for all jewellery with the 'Hallmark' sign, loans are sanctioned on the basis of the weight, purity and current market value of gold.

Lenders sanction on gold with a carat range of 18 to 24. The value or weight of precious stones, if embedded in the gold jewels is disregarded. For any jewellery without the 'Hallmark' sign, valuation may be unreliable and you may end up with a lesser amount.

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Documents required

Loan against gold requires minimal credit appraisal of the borrower in comparison to personal loans. In general the following KYC documents are collected from a borrower:

• Loan application with passport size photograph of the applicant
• Proof of identity such as PAN card, passport, voters ID
• Proof of signature such as PAN card, passport, driving licence, bankers verification, government ID card, photo credit/debit card with signature, bankers verification
• Proof of address such as ration card, sale agreement, electricity bill, passport, municipal/property tax receipts, driving licence, passport, leave and license agreement if staying on rent

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The interest rate

Interest rates are generally more attractive than personal loans. However, one must keep in mind that the interest rate depends on how much margin of safety you give to the lender. So the more jewellery you pledge lower will be your interest rate.

Interest rates generally vary between 10 per cent and 20 per cent. There are many scheme variants offered by lenders such as reducing interest rates if the loan is repaid within a period of one month or so.

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Loan against gold ETF/gold units

Recently, a few finance companies such as Muthoot Capital Services and Reliance Commercial finance have introduced loans against gold exchange traded funds and gold units. As these units are in dematerialised form, they are easily transferable, easily en-cashable and can be traded in stock exchanges.

With such an option available investors need not have to go through procedures like assessing the quantity, purity and price of the gold.
  
An afterword...

Many Indian households still attach a lot of value to their traditional gold heirloom. Selling them even in times of need is seldom appreciated. At such times gold loans may prove advantageous. Of course not always do the interest rates prove attractive. A gold loan is especially ideal for situations where you are expecting future cash flows but currently are in need of cash. At such moments instead of liquidating the gold you have, by pledging it your requirements could be met.