Cross-check with multiple lenders for accurate valuation

For fairer assessment, select a lender that uses an external assayer

Two developments in the recent past have put gold loans in the spotlight. Kotak Mahindra Bank forayed into this rapidly growing segment (17.4 per cent growth year-on-year, according to the Reserve Bank of India’s [RBI’S] data of January 26). Meanwhile, the regulator debarred IIFL Finance from disbursing fresh gold loans due to “material supervisory concerns”.

Flexible repayment options

The primary appeal of these loans lies in their low interest rates as they are secured loans. Borrowers also do not need a good credit history. “Lenders are happy to lend even in the absence of a credit history due to the valuable nature of the collateral,” says Adhil Shetty, chief executive officer, Bankbazaar.

These loans also come with flexible repayment options. In conventional loans, borrowers pay a monthly EMI comprising principal and interest.

One type of gold loan allows the interest to be deducted upfront from the loan amount.

“If you borrow, say, ~1 lakh for a year, and the interest amount is ~10,000, you are lent ~90,000.

You only repay the principal through EMIS,” says Shetty.

Some gold loans permit bullet payments: the borrower settles the principal and interest in a lump sum at the end of the tenure. In this example, they would pay ~1,10,000.

Sometimes, gold loans combine both these features: upfront deduction of interest with a bullet payment at the end of tenure for the principal.

Nowadays, gold loans also come with an overdraft facility. These are more flexible than a regular overdraft facility.

Need to top up collateral

The loan amount is based on the valuation of gold jewellery and the loanto-value (LTV) ratio offered to a customer, subject to the regulatory cap of 75 per cent. “If a sharp fall in gold’s price leads to the LTV ratio exceeding the 75 per cent cap, the lender can ask the borrower to either pledge more gold or deposit cash,” says Saahil Arora, chief business officer (lending), Paisabazaar. He adds that if the borrower fails to do so, the lender can sell the pledged gold.

Another drawback is that if the need to access this gold arises, it is not available unless the loan is prepaid and closed.

Who should go for them

Arora says customers who possess gold jewellery but are either being denied a personal loan or are being asked for a high interest rate due to their poor credit profile may consider a gold loan.

Those in need of quick disbursal may also go for these loans. “

Most lenders evaluate applicants primarily based on the quality of their gold jewellery, without emphasising other aspects of their credit profiles. Hence these loans get processed quickly,” says Arora.

According to Shetty, the repayment flexibility offered by gold loans suits those who anticipate cash flows at specific times.

Compare costs

While various repayment options exist, not all lenders offer them. “Even if a particular repayment option is available, it may not be offered to you. Check the specific option being offered and understand its cost,” says Shetty.

Interest rates may vary from one lender to another and from one repayment option to another. “Shop for the best rate as it can vary significantly,” says Shetty. Look at the key facts statement (KFS) to understand all associated costs.

Choose lender carefully

The value of the loan is always lower than that of the pledged gold, so there is always the risk of the lender decamping with your collateral. “Go with entities regulated by the RBI,” says Shetty. Stick to a lender that is reputed to have a secure mechanism for storing the collateral.

RBI’S recent action has focused the spotlight on valuation. If the valuation is incorrect, the borrower could end up with a smaller loan. “Visit at least a couple of lenders to establish the value of your asset,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Going with a lender who uses an external assayer is advisable. “Though the disbursal may get delayed, you will get a better estimate of the purity and value of your gold when an external assayer is used,” says Dhawan.