Gold Loans: Why Do They Make Financial Sense?

Gold Loans: Why Do They Make Financial Sense?

Even with the most careful financial planning, there may be some emergencies that you may not be prepared for. For instance, an unexpected illness, damage to a vehicle or the loss of a job may leave you in need of additional funds. Here is where a gold loan may be a financially sensible option to consider. 

What is a Gold Loan?

A gold loan is a kind of secured loan, wherein you can pledge any gold assets you own with the lender and receive funds in exchange. The gold serves as collateral for the loan. Typically, the maximum amount you can borrow against this kind of asset is limited to around 80% to 90% of the value of the gold pledged. 

Today, many leading banks in India offer gold loans for borrowers who are in need of some emergency financial assistance. For instance, there are several Union Bank gold loan offered by the Union Bank of India. Including the Union Krishi Kamdhenu Gold Loan Scheme, the Union Gold Loan Retail scheme, the Union Secured Overdraft Gold Loan scheme and more. 

(Other leading banks like HDFC Bank, Central Bank of India, Axis Bank and the State Bank of India, among others). The gold loan interest rates tend to vary from one lender to the next. For example, the BOB gold loan interest rates comes in at around 8.85% per annum. While the Union Bank gold loan interest rates start at around 8.40% per annum. So, you need to compare the rates before choosing a loan. 

4 Reasons Gold Loans Make Financial Sense

Now that you know what gold loans are and how they work, it’s essential to understand why these borrowings make financial sense in certain situations. Check out these reasons below. 

  1. Easy Eligibility Criteria

Gold loans often come with eligibility criteria that are simple and easier to meet. Since they are secured loans, the lender primarily checks the value and the quality of the gold pledged. Also, because the presence of a pledged asset reduces the risk to the lender, the eligibility criteria are typically less stringent in terms of documentation, income or credit scores. 

  1. High Value Loans

The amount of funds offered in a gold loan is typically calculated as a percentage of the value of the gold pledged. With the value of gold generally seeing an increase over the years, it is easier to obtain high value loans in this manner. The loan-to-value (LTV) ratio of gold loans also tends to be on the higher side, at around 80% to 90% of the value of gold offered as collateral.

  1. Quick Processing and Fund Disbursal

Since the documentation is fairly minimal, banks take much less time to process gold loan applications. Digital gold loans make the process even quicker, which is why gold loans are excellent options if you are in need of some immediate cash. 

Furthermore, the disbursal of funds to your account is also completed in a fairly short period of time, making the whole process simple and short. 

  1. More Affordable Interest Rates

Gold loans being secured borrowings, the lender’s risk is reduced by quite a bit since there is an asset backing the borrowing. This means that banks do not need to fix high interest rates to offset the risk of lending money. For this reason, gold loans often carry lower interest rates than other unsecured borrowings. 

As a result, when you avail a gold loan, the overall burden of interest is relatively lower. This makes debt management and debt repayment easier, since it puts less of a strain on your finances. 

Things to Keep in Mind Before Taking a Gold Loan

A gold loan makes a great deal of financial sense in various situations. However, you need to keep the following important things in mind before applying for this kind of a loan. 

  • Gold Valuation

Know the value of the gold you are pledging, so you can have a better idea of the maximum amount of money you can borrow.

  • Comparison of Interest Rates 

Compare interest rates from different lenders to find the best offer you are eligible for. This way, you can keep your interest payouts low.

  • Prudent Borrowing

Only choose this option if you are in need of emergency cash and have no other go. A gold loan is best not used for more discretionary needs like funding your travel plans or the like. 

Conclusion

As you can see, a gold loan is often a good alternative to a traditional unsecured loan if you have some emergency financial requirements. That said, ensure that you repay the dues promptly, as per the repayment schedule set by the lending bank. This will have a positive impact on your credit score and will also allow you to repossess the gold that you offered as collateral. 

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