What Are Gold Loans And How Do They Work? - Get Jewellery Loan | Worldwide Jewelry Loan Solutions

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Tuesday, January 18, 2022

What Are Gold Loans And How Do They Work?

Gold Loans And Their Work

Gold loans allow the borrower to keep their gold, which ranges between 18K and 24K, through a bank or bank as security. Then, the borrower can access capital. In terms of comparison, the term "gold loan" could be viewed as an equivalent concept to the concept of a "mortgage loan" in which the borrower keeps their house or property mortgaged with the bank and then takes the loan to cover their needs to fund their capital needs.

How Do Gold Loans Work?

Gold loans are one of the banks' most profitable loans since banks are not subject to the worries of non-performing assets (NPAs). This is because the bank holds the gold that is considered collateral; even if the borrower fails to make installments, they pay monthly (EMIs) of their loan.

How a gold-backed loan operates is as follows:


Verifying the quality: When an individual approaches an institution to get a loan for gold, The first step an institution will take is to verify the authenticity and quality of the jewelry being used as collateral and determine the worth of the jewelry.

Gold Loans Tips || Get Jewellery Loan
Gold Loans Tips || Get Jewellery Loan



"Know Your Customer" (KYC) Know the norms of your customer and check according to the Reserve Bank of India (RBI) are executed by banks, in which the bank learns the customer's information, including the identity of the person, their financial history, need for the application for a loan, as well as other information essential in providing the loan.

Approval of a gold loan After the quality and worth of jewelry has been identified, and the KYC procedure is completed, The loan's terms are approved by the financial institution and consumer. After the agreement that the loan has been approved, the loan is deemed to be agreed, and the money is transferred to the borrower's bank account. The entire process is accomplished in just a couple of hours.

What are the Features of a Gold Loan?

Rates of interest

The interest rates on gold loans depend on the gold's purity—the more pure gold, the more amount available. The rates of interest range between 8% up to 18% within the public sector; however, these rates can go up to 24% per year for the private sector.

Haircuts and loan to value ratio (LTV)

By the RBI's guidelines, banks can lend up to 90 percent of the gold's value as a loan, with at least 10% as a haircut. In general, the ratio of loan to value varies between 55% and 65%, which is approximately a 35% to 40% margin for banks, which is the safest bank loan.

LTV or loan to value ratio LTV ratio is the amount a client can get in exchange for the value of gold. In the example above, when the value of the jewelry exceeds INR 10,000 while the LTV is at 65%, then the maximum amount that a customer can avail is INR 6,500.

Tenure

Gold loans are usually a loan with a medium-to-short-term duration with a tenure anywhere from six months to up to. This means that it isn't an instrument that is long-term in nature.

The loan is available to anyone with people with poor credit scores.

Because the jewelry is deposited at the bank as collateral for the loan and the bank is sure of approving a loan to the applicant even if they have a poor credit score.

The stones' weight and their worth aren't considered.

Although precious stones are of immense value, they're not included in the calculations for a loan made from gold. Only the gold's value is considered in the analysis. Hence, digital gold products are frequently preferred over a standard product for the offering.

Who Should Opt for a Gold Loan?

People who have a short-term requirement for funds

A gold loan is a standard working capital loan for companies that meet money. It is preferable to personal loans that have negative interest rates on a comparison basis in these situations.

For those with low credit scores

Since the jewelry serves as collateral for this loan, the lender can approve an investment in gold, even someone with a poor credit score.

People who own gold have a personal loan.

If you are considering taking out a personal loan for a shorter period and those with gold sitting in their lockers, they should consider getting gold loans instead of an individual loan to cut down on the interest costs.

The people who choose to take gold loans in the informal sector

People are considering taking out a gold loan from non-organized players in the event of being turned down by banks who may not offer the loan due to their credit rating and history. They pay high-interest rates that range from 25-50 percent per year.

Gold Loans Tips || Get Jewellery Loan
Gold Loans Tips || Get Jewellery Loan



A gold loan from banks or other organized players is the best option as credit history isn't an element that affects the money given through a loan. It is 100% secured. This will help reduce the interest cost since banks have to charge interest by RBI guidelines that are market-compliant and not overly expensive.

How to Opt For a Loan Using Digital Gold?

With the advent of digital gold-based products, consumers now have access to an option that is more profitable to lessen the total interest cost on gold-related loans.

You might consider selling the physical gold (available in the form of "vedhnis," biscuits, bars, and coins) and then changing the cash into a digital sovereign gold bond (SGBs) type. This will benefit you in two aspects. 

One in securing the money you need and secondly, earning an interest rate of 2.5 per year on the face amount in the duration of the loan and thereby reducing the total price of the credit. For instance, the SBI's interest rate for loans against SGBs is 9.25 percent, however since the base is an SGB and the cost-effective is 6.75 percent per year.

Tax Benefits

Tax benefits associated with the utilization of the Gold Loan to meet specific motives include:

The purchase of a home or any improvements to its tax benefits may be accessed in sections 24 (b) and 80C of the Income Tax Act, which allows for the exemption of the qualified portion of the interest expense and principal repayment, respectively, thereby decreasing the total cost of loans.

The interest cost for business: The expense for a gold-backed loan used for business is deductible when filing tax returns as an expense for industry, thereby cutting down on your tax burden.

Bottom Line

In general, gold loans can aid when you require capital in a hurry. It is not enough to know about these loans to deal with future requirements and understand the new versions that are more secure and can effectively lower the total interest cost of the loan.

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