Apr 15, 2013, 01.26 PM | Source: Moneycontrol.com
Indians have special attachment towards gold. Sometimes this attachment goes beyond the obvious intentions of gaining from any rally in gold prices.
Rajiv Raj (more)
Founder & Director, Creditvidya.com | Capital Expertise: Fixed Income ,Mutual Funds ,Tax ,NRI
For Indians, gold remains a safe haven that provides peace of mind when many avenues of investments seem to be unremunerative. With the recent fall in gold prices, there is an increasing interest among investors to accumulate this alluring asset. Some wait for further fall. And then there are experts, which are predicting the end of bull run in gold prices. Amidst such mixed signals on gold prices there is a lucrative opportunity of availing a loan against gold. It is largely observed that availing loan against gold is a far better option than availing personal loan. Let us see how availing loan against gold works better than a personal loan.
A banker is always comfortable lending against a security compared with a loan application backed by no security. Better the quality of the security, faster the loan disbursement. Your gold ornaments are a good security for a bank. Bank knows the fact that in case of non-payments of dues it can auction the gold and realise its dues. Typically, a bank lends against your ornaments in a few hours. This includes the processing of the loan application and ascertaining the value of your ornaments. You can avail up to 60 percent of the value of gold ornaments. Banks charge interest rate in the range of 13 percent to 14 percent on the loans against gold. These loans come with tenure of one year. Banks do not ask for a guarantor while disbursing a gold loan. Some banks do entertain pre-payment of loans without any pre-payment penalty and in some cases it is around 1 percent. And all this comes to you at a nominal processing fee of around 1 percent of the sanctioned amount of the loan.
Juxtapose these advantages with a personal loan. A personal loan comes with tenure of one to three years and the rate of interest charged ranges from 16 percent to 22 percent depending upon the credit profile of the borrower. A borrower has to arrange for a guarantor while taking a personal loan. Banks insist on income proof and conduct thorough due diligence to ascertain applicant's repaying capacity. This takes at least three days to couple of weeks to process and disburse the loan. You have to pay around 2 percent to 3 percent processing fee for a personal loan. If you choose to prepay it, the prepayment charges are around 2 percent to 3 percent. Compared with gold loan, personal loans score low for the borrower on all parameters including ease of getting loan and the price to pay for such a loan.
Hence, gold loans can be a good alternative to personal loans. You can judiciously use gold loans in multiple ways. It can help you raise funds to pay off some high cost liabilities such as credit card outstanding. You can raise money for medical emergencies using gold loans. It can also help you pay for some important expenses such as your child's education. If you are running a business, you can consider taking an overdraft facility against the gold ornaments deposited with the bank. This can help you meet your working capital requirements as and when they arise. You pay a simple interest only for the amount utilised for the number of days. Some individuals can look at such overdraft facility against gold as a very good alternative to 'creation of an emergency fund'.
For example, a salaried individual may find it difficult to keep aside money equivalent to one year's expenses aside, but he can keep his gold ornaments with the bank and take an overdraft facility that allows him draw funds if need be. Thus, gold loans can help you strengthen your financial plan and come handy to you in many ways.