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Gold loans can help one tide over a temporary cash crunch. You can get a loan quickly with minimum paperwork. The lender doesn't check credit scores or evaluate the borrower's repayment capacity while giving a loan against gold.

Such loans can help small business owners tide over the temporary cash issues, or someone who needs emergency money, or if an individual plans to consolidate debt.

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You can get a gold loan from a bank and a non-banking financial company (NBFC). Within NBFCs, some companies are focussed on gold loan business, like Manappuram Finance and Muthoot Finance. They are the quickest to disburse the loan.

Before you take a loan against gold, here are a few things that you should keep in mind.

Banks versus NBFCs

There is one key difference between banks and NBFCs. The former offers better interest rates, and NBFCs can lend higher amounts. How do they do it? They value your gold at a higher price than banks.

Suppose a borrower has a 20-gram necklace of gold that he wants to pledge. Banks and NBFC both offer the borrower 75% of the value of the gold. If a bank values your gold at, say, 46,500 for 10 grams, the NBFC could value it higher.

There are other smaller differences, too. For example, NBFC that primarily lend against gold can offer loans faster as they value the metal in-house. Not all bank branches may have this facility, and they may call a valuer for it.

Lenders don't accept gold bars

The minimum purity that lenders accept is 18 carats. Most lenders may not consider gold below this purity. Many lenders also don't lend against gold bars. However, you can pledge jewellery and gold coins. Do keep in mind that the lender will not consider diamonds or stones that are part of the jewellery when valuing it. They will only lend against gold.

In the case of coins, they may ask for higher purity and have restrictions on the weight. Many don't accept coins above 50 grams.

Charges

Most lenders don't have prepayment charges. Even if a few levy it, they are around 1% of the outstanding balance. There could also be valuation charges and processing fees.

Repayment

There are multiple repayment options that you can choose from, depending on the expected cash flows. You can repay in equated monthly instalments (EMIs), or you can only pay interest during the loan tenure and one-time principal payment at the end.

Some lenders, especially NBFCs, could deduct the interest portion before disbursing the loan amount. Say a borrower is sanctioned 50,000 loan and the interest charges are 5,500. The lender will only disburse 44,500.

Non-payment

If you are unable to repay the loan on time, lenders have the right to sell your gold. Also, if gold price falls, the lender may ask you to pledge additional gold. The lender would want to maintain the loan-to-value ratio all the time; that is, the value of the gold they hold should be more than the money they have disbursed.

Gold loans are convenient but opt for them only when you are facing a temporary cash-flow problem. Don't use them to fund a big expense, like buying a house. Keep the tenure as short as possible.

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