Gold loans: How to choose between the regular EMI option and overdraft facility

With rising demand for gold loans, banks and non-banking financial companies (NBFCs) are now offering variants to borrowers. Borrowers are in dilemma over which one is better for them and will save them interest costs. The two most popular gold loan options that most banks are offering are gold loans with regular equated monthly instalments (EMIs) or with overdraft facility. Let’s look at the difference between them and which one is the most viable option for you.

What is a gold loan with an EMI option?

A gold loan with an EMI option requires you to pledge your gold to the lending institution. The bank or the lender will then deposit a lump-sum loan amount in your bank account. The repayment of principal and interest will be commenced from the month following the month of loan disbursement. Both banks and NBFCs offer this facility.

How much can you raise by pledging your gold?

The Reserve Bank of India (RBI) has allowed an increase in the loan-to-value (LTV) ratio for loans against pledged gold: to 90 per cent, from 75 per cent in March. In simple words, your loan amount can be 90 percent of your pledged gold’s value.

The interest rates charged by banks are 7.40 per cent to 15 per cent a year. NBFCs charge 9.24 per cent to 12 per cent annually. The rates remain the same throughout your loan tenure and the repayment is done in fixed instalments. This is a standard loan repayment option catering mainly to the salaried class that has steady monthly cash inflows.

Naveen Kukreja CEO & Co-founder of Paisabazaar.com says, “Regular servicing of the principal component right from the start of the loan tenure leads to lower interest cost.”

What is a gold loan with an overdraft facility?

Taking an overdraft facility means that you do not get a lump-sum amount at the start. You only get a sanctioned limit, within which you are free to spend as and when you want to. It’s like a charge card and works somewhat like a credit card. Your lender specifies the sanctioned limit and you’ve got to spend within that ceiling.

Interest is charged only for the amount utilised from the sanctioned credit limit. The LTV ratio for gold loan against overdraft facility is kept lower by lenders, i.e., up to 75 per cent compared to gold loan with EMI option which allows up to 90 per cent. The interest rates are comparatively higher than those on gold loans with EMIs.

SBI, DCB Bank, Federal Bank, Bank of Baroda, etc. offer an overdraft facility against pledged gold. When you deposit your gold as collateral to your bank, it opens an overdraft account. Federal Bank offers an ATM card, mobile banking and net banking facility linked to an overdraft account. Some banks even issue cheque books to access the loan amount from the overdraft account. These overdraft accounts have transaction facilities and monthly interest is to be served for borrowing the amount from the account. The gold loan overdraft facility is especially useful for self-employed borrowers.

Is a gold loan with overdraft facility risky?

Many people are not used to operating an overdraft account. So, they don’t know that monthly servicing of interest is absolutely critical. In an interview with Moneycontrol, Praveen Kutty, Head Retail and SME Banking at DCB Bank had said, “Technically, the gold loan borrower becomes a non-performing asset (NPA) if they don’t service the interest to the bank on the overdraft gold loan account for three months, even if the balance he has utilized is well below the sanctioned limits. So, you should always ensure that your outstanding loan is less than the credit line offered against gold deposited with the bank.” So, even if you have utilised an amount far lower than what has been sanctioned to you, it is still a loan. And you’ve got to pay interest on whatever amount you spend out of your overdraft account.

Which option is better?

Choosing between a gold loan with an EMI option or overdraft facility depends on your convenience and fund requirements. However, a gold loan with an overdraft facility proves to be beneficial as it charges interest only on the amount used while giving access to borrow more from the sanctioned credit limit. Banks allow you to withdraw from the overdraft account with ATM cards, mobile banking, net-banking and cheque books. This feature gives an access to credit 24/7. So, it’s best suited for medical emergencies in the family and business capital requirements of the self-employed for a short tenure.

In an EMI option, interest is charged on the entire loan amount even if you are not utilising the sum immediately. The sanctioned amount may end up lying idle in your savings account for future requirements. The gold loan EMI option is best-suited for making planned expenses that are fixed and require using the full borrowed amount immediately.