Check few things before taking gold loan

Most of the banks are giving loan against gold. In this regard to target mindset of Indian women ads are being aired in which you hear Indian women saying:

“Jab ghar girvi rakh sakte ho, toh gehne kyon nahi (When you can mortgage your home, why not jewellery)?” goes one.

“Ek locker se doosre locker mey hi toh jaa rahe hai (the jewellery is just moving out of one locker into another)” says another.

Earlier in India selling or mortgaging the gold jewelry of one’s mother or wife to get money for financial needs was not considered good. With time change has come in thinking now people are ready to mortgage gold jewelry, even ladies easily give their gold to get loan.

But there are few things to be kept in mind while taking loan against gold.

There are private financial companies that offer loans against gold and the interest rates vary widely.

Among the banks HDFC Bank, ICICI Bank, State Bank of India and its associates, Allahabad Bank, Development Credit Bank, etc. are giving loans against gold. There are a host of cooperative banks also that are offering these loans. There are some non-banking financial companies (NBFCs), which do not take deposits of money from public but give loans. Major Private Players include south-based players such as Manappuram Finance and Muthoot Group.

The interest rates on gold loans are lower than those charged for personal loans. For instance, one leading private sector bank charges up to 18% interest on personal loans, but on gold loans the bank charges 15.75% or less. Then another bank charges 14.5-16.5% for personal loans while on gold loans it charges 12.5%.

However NBFCs interest rates are high in comparison to banks. For example Muthoot gives loans at a fixed rate of 33.6%. The difference in rates charged is quite huge.

There interest rate varies depending on the quality of gold jewelry. If your jewelry is hallmarked and have a ‘BIS’ stamping by a hallmarked jeweler which indicates the purity of the gold used, the interest rate charged on this jewelry will be lower than on non-hallmarked jewelry. The difference can be based on carats of gold, whether 22 or 18, etc.

The gold jewelry is not 100% pure. Pure gold is available only in the form of gold coins and bars, which are not accepted by most banks and financers. People have an attachment to their jewelry thus when prices of gold move up or down the borrower comes back to take back the jewelry but in case they gold coins or bars, when the gold prices fall down the borrower never come back to free his gold.

The head of a leading NBFC told DNA, “If the value of gold falls below the loan amount, the borrower will never come back to free his gold. But if he has mortgaged his grandmother’s necklace, whether the price goes up or down, he will come back for it.”

Then the loan amount is much less than the jewelry is worth, even though the jewelry is hallmarked and of high quality.

At present the gold price is around Rs 16,785 for 10 gram but all the banks do not take into account, leave alone NBFCs.

Every bank might have its own method of calculating the value of the jewelry you offer to mortgage. Some banks have fixed the consideration price at a level (say Rs 1,005-1,215 per gram) for about 6-12 months and a year later it can revise it, regardless of market price of gold in the international markets.

Few others take an average of two weeks’ market price and value of the jewelry to that extent. Some of them take into consideration the day’s international trading price and offer a loan according to the value of gold on that price.

Bankers keep an extra cushion because of purity issues and also there have been cases where banks have been cheated by some jewelry valuers on purity in recent times.

The method of calculating price of gold by the bank can create a huge difference in the amount of loan you are eligible for- it can be as much as 5-10% of the loan amount.

The amount of loan can also be based on the period for which the loan is needed and the frequency of repayment.

Before finalizing the financer for a loan against gold, do the entire enquiry. Check for the difference on the offering per gram, and whether it is after deducting the processing fees, etc. Also check bank or NBFC is giving the loan amount you need.

Choose the big branches of banks offering loans against gold jewelry as small branches do not have huge storage space, wouldn’t be offering loan against gold.