How Gold Loan Helps You In Different Sectors For Multiple Purposes

A person often ends up in a situation where the savings in the bank account is not enough to cover for certain expenses. This could arise suddenly, like a medical emergency, or could be in the making but unaccounted for such as to meet extra expenses for a foreign holiday, paying for a child’s college admission, contributing for a family wedding, paying a vendor for one’s own business or more.

Different lenders have created various loan products that are aimed at a specific use or purpose. What’s more, some service providers have tied up with lenders to offer upfront credit too. For instance, a travel agency could be offering a travel-now-pay-later as a debt product to sell and push their own ticket sales.

Then there are debt products like a personal loan, which is a generic form of loan where the lender does not insist on sticking to a particular way to spend it. This means a personal loan can be used for any legitimate purpose.

But the right way of financial planning is to take a loan that would be more appropriate and cost the least in terms of interest expense. Here a gold loan becomes a more efficient way to borrow.

Gold Loan

The product is fairly simple and has been in use for millenniums in the country. It is a secured loan where a gold jewellery owned by a person or the immediate family is pledged to borrow money. The lender gets a security in the form of a gold jewellery whose value is much more than the amount lent so it gets reasonable assurance that the money will be paid back.

While previously it was offered by local moneylenders who used to advance money by keeping the gold jewellery as a security, these days it is a formal debt product offered by both banks and non-banking finance companies. There are also specialised gold loan companies.

There are some key aspects that one should know about gold loans.

• LTV Ratio:

Lenders do not advance the entire value of the gold jewellery to the borrower. By regulation they are asked to maintain a loan to value, or LTV, ratio. This is currently set at 75%. In other words, if the value of the gold jewellery is ascertained at Rs 1 lakh, a borrower can avail only up to Rs 75,000 as a gold loan.

• Only Metal, No Stone:

One key element of a gold loan is that the loan is only on the value of gold in the ornament. Often a piece of jewellery being pledged has diamonds or rubies or other stones attached. Although while purchasing the value of the jewellery may have been driven by the precious stone embedded in it, but they are discounted in a gold loan. The loan is only on the value of the gold and thereby only the weight and purity of the yellow metal is considered while putting a value on the collateral.

• Best Interest Rate:

A gold loan is a secured form of a debt product and given the value of the collateral is always higher than the amount lent, it is almost a risk-free lending product for a financial institution. They pass on the benefit in the form of low interest rate that they charge. In fact, due to this reason, a gold loan is considered the best form of short-term borrowing.

• Credit Score:

Gold loans are not dependent on credit scores, making it a fallback option as it may be the only form of personal loan that can be availed by a person with a low score.

How Gold Loan Is An All-Rounder

Given the salient features of the gold loan, especially low interest rates and no end-use restrictions, it is considered the most efficient way to borrow money.

A personal loan, too, offers flexibility of use but the maximum one can borrow is often limited and it may or may not be enough to cover the needs. On the other hand, a gold loan can be of much higher value as long as one can furnish that much gold in terms of weight in the ornament. Most importantly, the interest rate charged on a gold loan is much lower than on a personal loan.

If one has enough gold jewellery, one can even use it for business purposes. So, instead of availing an unsecured business loan, one can take a gold loan. This is particularly handy when the business is just starting and does not meet the basic requirements in terms of vintage or age to avail a business loan. A business owner can use a gold loan to meet the needs of the business.

Conclusion

While there are various specific use-based loans available in the market, there are essentially two forms of personal finance that are free of end-use restrictions. These are personal loans and gold loans as one has the flexibility of what they can do with the borrowed money. A gold loan offers many advantages over a personal loan. In fact, a gold loan can be used not just for meeting personal cash requirements but also for own business.

IIFL Finance offers instant gold loans starting from as small a value as Rs 3,000 without any maximum limit for up to two years.