scorecardresearchGold loan from banks, NBFCs can help you tide over a short-term financial crisis; But knowing these details is important

Gold loan from banks, NBFCs can help you tide over a short-term financial crisis; But knowing these details is important

Updated: 10 May 2022, 10:00 AM IST
TL;DR.

Gold loans are not exclusively offered by NBFCs but by commercial banks too. Let’s explore who charges lower rates 

You don't need a credit score to apply for a gold loan. Even a student can take a loan who doesn't have an income proof such as a salary slip.

You don't need a credit score to apply for a gold loan. Even a student can take a loan who doesn't have an income proof such as a salary slip.

Most precious metals and jewellery items are conventionally considered to be as good as cash, if not better. And among all of them, gold is believed to be the most sought-after and evergreen de-facto currency of sorts. Come rain come shine, the importance of gold doesn’t fade.

And in case you are too attached to your gold jewels, you can mortgage it to raise a loan offered at a modest rate of interest — rather than selling it.

Rates of interest levied on gold loan by NBFCs such as Muthoot Finance is different from what is charged by commercial banks. Muthoot Finance, for instance, charges a rate that starts from 12 percent per annum, whereas Manappuram Finance charges 9.9 percent onwards and IIFL's interest rate starts from 9.24 percent onwards.

Why gold loan?

There are some advantages of seeking a gold loan vis-à-vis a personal loan. The first and foremost is that the loan is available for a lower rate of interest as compared to other unsecured loans such as personal loan. Another reason is that it can be availed by anyone and everyone.

“What makes gold loans distinct is the fact you don't need a credit score for seeking these loans. Even a student can take a loan who doesn't have an income proof such as a salary slip,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.

Banks charge lower rates

Banks usually levy a slightly lower interest rate on gold loans. For instance, HDFC Bank charges 9.9 percent, ICICI Bank levies an interest rate that is 11 percent per annum onwards and Canara Bank charges 7.65 percent whereas SBI charges 7.5 percent per annum.

Another difference one can notice between the two category of institutions is the amount of loan and processing fee one has to pay.

Sample this: Muthoot Finance offers loan for as small an amount as 1,500 while the processing fee is anywhere between 0.25 percent to 1 percent one of the loan amount. Likewise, Manappuram Finance offers loan starting from 1,000 and levies a negligible processing fee.

However, banks tend to charge a higher processing feee and the loan amount is also bigger at the same time.

Lender                                     Interest (%)Loan amount
Muthoot Finance                     12 1,500
IIFL                                                   9.24 3,000
Manappuram Finance                     9.90 1,000
HDFC Bank                                   9.90 25,000
ICICI Bank                                          11 10,000
Bank of Baroda                                8.75Up to 25 lakh

(Source: paisabazaar.com)

 

For instance, HDFC Bank offers gold loan for an amount greater than 25,000 and levies 1.5 percent processing fee, Axis Bank's minimum loan threshold is 25,000, which is 10,000 for ICICI Bank.

It is worth pointing out that gold loan portfolio across banks rose by over 89 per cent year-on-year to 60,700 crore in fiscal 21 and 70,900 crore in the first nine months of fiscal 22, according to India Ratings and Research report.

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Also, the rating agency said the gold loan auctions by NBFCs rose in April-Dec of fiscal 22 — the highest since fiscal 14 when gold saw larger volatility in its prices.

However, it is vital to mention that a borrower might lose the jewellery if they fail to repay the loan. And the value of the jewellery is usually much higher than the loan taken. One can get only 75 percent of the value of jewellery. Add to this the making charges.

So, what you would end up receiving would be far lower than what you spend on your gold jewellery.

First Published: 10 May 2022, 10:00 AM IST