The practice of placing gold as a collateral to avail loans has been prevalent since ancient times. While traditionally, credit has been frowned upon in certain sections of India, mortgaging gold has received universal acceptance. People would pledge their gold ornaments with relatives and acquaintances as security when taking friendly loans.
Now, banks and fintech players have created an organised framework for the age-old practice of pledging gold for obtaining funds. The financial entities offer loans up to a certain value of the gold. Customers pay interest on the loan availed and receive their gold back when they repay the loan in full. It helps them to utilise their idle assets and tide over temporary and urgent need for liquid funds.
Over the years, gold loans have become popular with customers due to various factors:
Since the loans are availed by pledging a physical asset, the risks of the loan becoming bad are minimal, which reduces the time for determining creditworthiness and allows for quick processing. Customers can simply walk in with their gold and come out with the funds. The hassle-free and quick turnaround is ideal for customers who need immediate cash.
Flexible repayment options
Banks and other financial entities offer flexi-payment facilities wherein the customer can purely pay the due interest amount for a fixed period of time. They can defer the payment of the principal for a certain period. It offers customers the flexibility to manage their finances. Alternatively, there are schemes where the customer can repay through equated monthly instalments (EMI), which comprise both interest and principal.
Lower interest rates
Interest rates in gold loans are comparatively lower than other loan products. This makes it an attractive option for customers compared to personal loans or credit cards.
Low processing fees
Lenders generally offer gold loans at minimal or zero processing fees. It reduces the upfront outflow of expenses incurred by the borrower to obtain the funds.
Minimal foreclosure charges
Foreclosure of gold loans attracts minimal foreclosure charges. While some lenders do not levy prepayment charges, others may charge 2% on the outstanding sum. It reduces the customers’ overall loan servicing expenditure.
Minimal requirement of documents
The lenders usually require lesser documents for disbursing gold loans. Again, the credit norms are relaxed as the borrower is depositing a physical and appreciable asset with the bank as security. Consequently, the processing time is reduced, which makes it easier and faster to obtain the funds.
No impact of poor credit history
Credit history, which is an important parameter for processing loans, does not hold as much material significance in gold loans as the asset is parked with the lender. Hence, borrowers with poor credit history can also avail of gold loans.
Productivity of idle assets
Borrowers generally pledge those ornaments that they don’t use regularly, for instance, family heirlooms, etc. It ensures that the idle asset fetches some value without having to sell it. Through a gold loan, borrowers can productively utilise their idle assets.
Unrestricted use of obtained funds
There are times when people need funds for unplanned expenses at short notice – medical emergencies, marriage in the family, etc. In such situations, gold loans can provide funds with no restrictions on the end use, unlike, say, in car loans or home loans, where the funds can only be deployed for specific purposes.
Gold loans are highly liquid in nature. You can walk in with a few documents along with your gold and walk out with the funds. Likewise, you can also redeem the loan instantly and get your gold back immediately.
In conclusion, gold loans are always an attractive proposition for both banks and customers due to the inherent value of gold. The yellow metal has always been an appreciable and bankable asset. Given the symbolic significance of gold in Indian society and its economic value, it will always occupy a special place in Indian homes. Now, gold loans have given Indians a chance to optimally utilise their valuable asset.
Sanchay Sinha is Country Head – Retail Banking, South Indian Bank.