Pros and Cons of taking Gold Loan in India
By Anupama Deshpande | Mar 05, 2023
Gold loans are a type of secured loan in which gold is used as collateral. Gold loans are becoming an increasingly popular option in India for those looking to secure quick and easy funds. In India, gold is considered a valuable asset and taking a gold loan has become a popular financing option.
Gold loan is a popular form of secured lending in India where borrowers pledge their gold jewelry or ornaments to avail of funds from the lender. This type of loan has become increasingly popular in recent years due to several reasons.
Firstly, gold is considered a safe and reliable asset in India, and most families possess gold in the form of jewelry or coins, making it easily accessible collateral. This also makes gold loans easily available to borrowers without a credit history or a poor credit score.
Secondly, the process of availing a gold loan is relatively simple and hassle-free. There are no lengthy paperwork procedures or credit checks involved, and the loan can be sanctioned within a matter of hours.
Thirdly, gold loans offer flexibility in terms of repayment. Borrowers can repay the loan amount in installments or as a lump sum at the end of the loan tenure.
Lastly, the interest rates on gold loans are comparatively lower than unsecured loans, making it an affordable option for those in need of funds.
Furthermore, during the Covid-19 pandemic, many people faced financial difficulties, and gold loans became a go-to option for them. Banks and financial institutions also started offering attractive interest rates and loan-to-value ratios to encourage borrowers to avail of gold loans.
However, like any other loan, gold loans also have their pros and cons. Let's take a look at them in the table format:
Pros of taking Gold Loan
|Easy Availability||Gold loans are easy to avail, and the loan amount can be disbursed quickly. This is because the collateral (gold) is readily available and easily assessable.|
|No Credit Check||Unlike other loans, gold loans do not require a credit check, and the loan is sanctioned based on the value of the gold pledged as collateral. This makes it easier for people with a poor credit score to avail of the loan.|
|Low-Interest Rates||Gold loans usually have lower interest rates compared to unsecured loans like personal loans or credit cards. This is because the gold pledged as collateral reduces the risk for the lender.|
|Flexible Repayment Options||Gold loans offer flexible repayment options to borrowers. You can choose to pay off the loan in installments or as a lump sum at the end of the loan tenure.|
|No End Use Restriction||Gold loans can be used for any purpose, unlike other loans where the end-use is restricted.|
Cons of taking Gold Loan:
|Risk of Losing Collateral||The primary disadvantage of a gold loan is the risk of losing the pledged gold in case of default. If the borrower is unable to repay the loan, the lender can auction off the gold to recover the outstanding loan amount.|
|Low LTV Ratio||The loan-to-value (LTV) ratio in gold loans is lower than other secured loans like home loans or car loans. This means that the loan amount sanctioned is lower than the value of the gold pledged as collateral.|
|Fluctuating Gold Prices||The loan amount sanctioned is based on the current market value of gold. If the gold prices fall during the loan tenure, the borrower may have to pledge more gold to cover the outstanding loan amount.|
|Processing Charges||Gold loans come with processing charges, which can be a percentage of the loan amount. These charges can increase the cost of the loan.|
|Interest Rate Fluctuations||Gold loan interest rates are subject to fluctuations based on market conditions. If the interest rates rise during the loan tenure, the borrower may have to pay a higher interest rate.|
Suggested reading 4 Gold Instruments Available to Investors in India
In conclusion, gold loans are a convenient and quick financing option for smaller loan amounts. However, borrowers should carefully consider the high-interest rates, risk of losing the gold, and the limitations on the loan amount before taking out a gold loan. It is important to weigh the pros and cons and make an informed decision. It is also equally important to do your research and understand the terms and conditions before taking a gold loan.Share This :
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