Financial planners insist that you keep at least three months of expenses as emergency funds. But if you haven’t been prudent enough, what do you do in a financial emergency? Use your credit card or take a personal loan? A better option would be to pledge your gold for a loan. After all, you would just be putting to use gold that would otherwise be lying in your locker unused and unseen for months or even years together.
“About 18,000 tones of gold is privately held in India. Jewellery accounts for 70% of the total gold,” says Ajay Mitra, managing director (Middle East and India), World Gold Council. At the current price of gold, this comes to around Rs30 trillion or around 50% of the Indian gross domestic product, or a per capita gold holding of around Rs30,000. So, why not use this money during an emergency.
Traditionally, gold was pawned to local moneylenders. Apart from issues of usurious interest rates, fraud, it was the social stigma tagged onto using jewellery to tide over financial woes that has made using gold the last option when in a financial need.
But that has changed today with a large number of banks and non-banking financial companies (NBFCs) having entered this space. What works to its advantage is the fact that the gold loans are cheaper than most other loans, other than a home loan, there is less paperwork involved and it can get processed in a few hours in some cases.
Whom to approach
Loans against gold are available with some public sector banks, such as Canara Bank and Allahabad Bank. Among private sector banks, ICICI Bank Ltd and HDFC Bank Ltd give you the option. NBFCs such as Muthoot Finance and Reliance Consumer Finance also provide this loan.
Suresh Sadagopan, a certified financial planner with Mumbai-based Ladder 7 Financial Advisory, says, “The advantage of taking a loan from a bank or an NBFC is that they offer better terms and lower interest rates compared with local moneylenders.”
Also, they are safer places since the lenders insure gold. R. Manomohanan, CEO, Muthoot Capital Services Ltd, says, “Gold kept with us is covered by a reputed insurance company against theft and natural calamities. The coverage under the policy is enhanced periodically, in accordance with the price of the gold kept as security, by paying additional premium.”
Moreover, organized lenders have a proper grievance process in place and accountability is higher, thanks to regulations laid by the Reserve Bank of India (RBI). It is a good idea to approach a branch close to your house for a loan, though unwritten, lenders prefer borrowers from the vicinity.
What can you pledge?
Banks give loan against gold ornaments. While all lenders take gold ornaments, some even take gold coins. For instance, Muthoot Finance takes gold coins and bars as well. Gold exchange-traded funds (ETFs), or State Bank of India gold certificates can also be pledged to banks. You can also pledge ornaments with stones but the weight of the stone will be deducted while estimating the amount of loan.
How much can you get?
Generally, you get 70-90% of the value of gold. The amount varies from bank to bank.
You may get a better deal if you pledge hallmark jewellery. For instance, State Bank of Hyderabad gives Rs1,250 per g for 22-carat gold with hallmark and Rs1,150 per g for 22-carat gold without hallmark.
RBI nods its approval in a circular that says: “Preferential treatment of hallmarked jewellery is likely to encourage the practice of hallmarking, which will be in the long-term interest of consumer, lenders and the industry. Therefore, banks while considering granting advances against jewellery may keep in view the advantages of hallmarked jewellery and decide on the margin and rates of interest thereon.” The maximum loan you can get is between Rs5,000 and Rs20 lakh.
Cost and tenor
The loan comes at fixed or floating interest rate of between 9.5% and 24% and varies from lender to lender.
Like any other loan, a higher credit score would work well for you to reduce the rate.
“We offer loans between 12% and 15.25% based on different parameters, including risk criteria and customer relationship with the bank,” says Biju Pillai, executive vice-president and business head (personal loans, gold loans, loan against securities and home loans), HDFC Bank.
While banks offer loans with tenors ranging from six months to two years, NBFCs have shorter durations of even a few weeks.
Types of loan
Generally, banks offer two kinds of loans against gold.
The first is a term loan where you can take the full loan as a lump sum and repay only at maturity instead of paying back every month along with interest.
The second is the overdraft facility, wherein you can draw more money than your available bank balance. For this loan, you have to have a savings account with the bank. If you don’t already have one, they will open one for you. You can use the funds as and when required. Under this option, you pay interest on the amount of the overdraft that you use and the time you use it. The interest part is debited from your account at the end of each month.
Surya Bhatia, financial planner and principal consultant, Asset Managers, says, “The type of loan primarily depends on the need of the borrower. If the borrower needs a one time lump sum, he should go for a term loan. But if he needs the loan over a period of time, overdraft facility is a better option. The interest cost in an overdraft option is lower since interest is charged only on the amount withdrawn and not on the entire amount.”
Most lenders do not charge a pre-payment fee.
You can renew the loan once the tenor gets over, but to do that, you will have to pay an additional renewal charge. Ensure that you service your loan on time, or you will be slapped with late payment fees. Never forget that your gold could be seized after the usual 90-day grace period gets over.