Interest rates on gold loans turn cheaper as prices soar

Allirajan M

Surging gold prices may be a dampener for buying the precious metal. But for those looking to raise funds quickly for meeting urgent financial needs to tide over the cash crunch caused by the COVID-19 pandemic, the price rise means that they can mobilise higher sums through gold loans at lower interest rates. The RBI (Reserve Bank of India) has cut the repo rate (at which it lends to banks) to its lowest level in 20 years last month. Following this, banks have reduced interest rates on gold loans by up to 40 basis points.

More loan for gold

The LTV (loan-to-value) for gold has increased nearly 11.3 per cent since the lockdown was announced in late March. Gold LTV, which was hovering around Rs 2875 per gram on March 24, stood at Rs 3197 per gram on June 10, data with the Association of Gold Loan Companies (AGLOC) India showed. Simply put, a sovereign of 22-carat gold (8 grams) would get you a loan amount of a little over Rs 25500 now compared to Rs 23000 in late March. AGLOC represents leading gold loan NBFCs (non-banking finance companies) such as Muthoot Finance and Manappuram Finance.

Banks and NBFCs offer loans for up to 75 per cent of the prevailing value of gold, which is referred as LTV. The rate of interest and the methodology followed in calculating the eligible amount for the loan differ among banks. Private sector banks charge a higher interest rate on gold loans compared to their public sector peers. NBFCs typically offer gold loans at a rate that is higher than that of banks.

Interest rates and other charges vary

State Bank of India (SBI) is offering ‘Personal Gold Loan’ at 7.75 per cent a year (Rs 7750 interest for a loan of Rs 1 lakh). The bank also charges an additional processing fee of 0.5 per cent on the loan amount (plus GST on the fee).

The processing and documentation charges, however, are not uniform and several private banks charge more than government-owned banks for the same. While some banks levy gold appraiser charges separately, which has to be paid by the applicant, others do not collect such a fee. The gold appraiser’s assessment would determine the loan amount—better quality gold would fetch higher amounts and vice versa.

NBFCs such as Muthoot give gold loans under the ’99 paise’ monthly interest scheme, which works out to 12 per cent per annum. Some NBFCs charge 14-18 per cent interest on short-term gold loans that have a tenor of just three months.

Gold loans are perhaps the easiest funding sources to tap in times of emergency. Banks do not insist on ‘income proof’ for availing such loans. You should, however, have an account with the bank to get the disbursement. There is no such requirement for availing gold loans from NBFCs.

“Being backed by adequate collateral in the form of jewellery or gold coins, lenders are more relaxed in terms of loan eligibility conditions while approving applications. Gold loans also have one of the quickest disbursals among most credit options,” says Sahil Arora, director and group head, Investments, Paisabazaar.com.

“Most lenders tend to disburse gold loans within a few hours of submitting loan applications, making them a good option for raising quick finances. Hence, those failing to avail unsecured loans due to poor credit profile can monetise their household gold for meeting their financial shortfalls and liquidity mismatches,” he adds.

“Gold loan is a secured loan. So, the rate of interest is lower compared to a personal loan. The processing fees and pre-payment charges are very low and several lenders waive these off,” says Adhil Shetty, CEO, BankBazaar.

Banks offer several options for gold loans including paying just the interest every month and settling the principal amount at the end of the tenure, a regular EMI (equated monthly instalment) option that works like a home loan where both interest and principal pay-outs are deducted and partial payments of both interest and principal are made. The bullet payment option allows the borrower to settle the interest and principal at the end of the loan’s tenure.

What should you do?

Gold loans work better than most other advances, including personal loans, as interest rates are much lower. If gold prices continue to rise, you would also get more funds if you choose to renew the loan. But use these loans wisely and avail them only when you need them.

“If you fail to repay the loan in a timely manner, your pledged gold may be seized and auctioned to recover the outstanding balance. It will also have a negative impact on your credit history and score,” BankBazaar’s Shetty says.  “As most lenders offer gold loans for a shorter tenure, applicants need to factor in their repayment capacity while availing gold loans,” says Paisabazaar’s Arora.