Navigating the gold loan process: A step-by-step guide for first-time borrowers

This article is authored by Krishnan R, Director and CEO of Unimoni Financial Services Ltd

India’s gold loan industry is poised to register significant growth this fiscal year, thanks to the surging credit demand in the country and gold loan’s metamorphosis as an attractive loan option.

India is the second-largest consumer of the yellow metal in the world and its organized gold loan market is worth Rs 6 trillion, which represents only 35 per cent of the total business. With a burgeoning middle class, increased financial awareness levels, and a shift in the borrowing culture, gold loans are playing a key role in people’s borrowing patterns and financial management.

For availing a gold loan, a first-time borrower has to keep the following things in mind.

1. Prove your identity

Along with gold, the borrower has to produce authentic identity proof, bank account details and KYC documents for availing a gold loan. The documents include identity proof, address proof, and a photo of the customer.

2. Know the valuation

You won’t get the total market value of your gold as a loan. RBI has instructed lenders to provide only up to 75 per cent of the gold value as loan amount. It is known as ‘loan-to-value’ (LTV). Normally, public sector banks (PSB) offer low LTV, private banks offer high LTV and gold loan NBFCs provide the highest LTV. RBI assigns every lender – PSBs, private banks, cooperative banks and gold loan NBFCs –a lending limit. They can disburse loans within their permissible limits. Moreover, the loan amount will directly be credited to your bank account. If you want cash, only up to Rs 20,000 is allowed to be given in hand.

3. Interest rates

You must compare the interest rates available in the market. Understand whether it is fixed or floating. The borrower should read the complete material provided by the lender to avoid any hidden charges, processing fees, pre-closure charges and additional fees.

4. Purity standards

The value of your gold varies with its purity. If the gold is 22 karat, it is good for business. If the yellow metal is 22 karat, its purity is higher and therefore it will fetch a higher valuation. Below 18 karat gold is not considered for pledging. Further, if your gold jewellery carries precious stones, they will not be considered for valuation. Only the gold component determines the market value.

 5. No branch visit

No need to visit offline branches to pay loan interest. Now, almost all institutions provide online facilities to service the loan. You can easily repay the loans using new-age repayment solutions such as BBPS, UPI, Scan and Pay etc. You have to visit the branch only when you decide to close the loan and retrieve your gold.

6. Loan renewal

Renew gold loans periodically. Since a gold loan is a short-term loan -- issued only for six months or one year -- the borrower has to pay interest regularly and renew it as and when the loan tenure expires. Failing to do so will lead to loan default and loss of the collateral.

7. Price factor

The biggest risk in the gold loan business is price fluctuation. If the gold price surges, it is a win-win situation for both lender and borrower. The borrower can avail of top-up loans. If it slides and the total value of the pledged gold falls below the loan amount, the lender will ask borrowers to pledge additional gold to match the LTV standard or pay the difference (the difference between the loan amount and the total gold value) till the gold price appreciates and surpasses the loan amount.

8. Safety and security

Since gold ornaments carry emotional value, pledging it to untrustworthy financiers will lead to its complete loss. Avoid unregulated entities and local moneylenders who will charge exorbitant interest rates and offer little security to your invaluable assets. Always do business with institutions that are under the scrutiny of the Reserve Bank of India. 

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.