What is Gold Loan and understand how it works

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What is Gold Loan?

Gold loan is a type of secured loan where gold is pledged as a security for the loan amount. Till the time the gold loan is repaid, it is kept in a secure locker by the banks or gold lending institutions. Gold is emergency and short term, given for a short period of time. It is like an emergency fund that comes in handy for any sudden need, which is available at low interest. It may be required for higher education, marriage, home repair, medical emergency, travel, down payment etc. Due to the high valuation, gold can be converted into cash in a very short time. Gold loan is the best option to meet the money requirement in such an emergency. Gold loan is available on the basis of purity and value of gold.

Financial experts say that taking a gold loan in case of emergency is better than taking a personal loan. Personal loan interest rates are higher, while gold loan interest rates are slightly lower. It is a flexible loan with low interest rate, easy to avail with easy processing. There is no need to provide more documents or proofs in this. Due to the high valuation of gold, loans up to 75 percent of its market value are easily available.

How is the market value of your gold calculated?

When you take your gold to the bank or NBFC from where you want to take a gold loan, they check the purity of your gold. According to the weight of gold, its purity and market value, they assess it. Thereafter, the loan amount is decided based on the market value of the jewelery on the date you have applied for the gold loan. If you pledge gold ornaments, then only the gold portion is valued in it. Its stones and other gems are not included in this assessment. If you take a loan against 24 carat gold coins, then these coins should be issued by the bank. If you have bought these coins from a goldsmith, then they will not be valid.

Can pawned jewelery be used on special occasions?

If there is a wedding in your home or you are planning to visit a relative with your family, then you can take your jewelery pledged for gold loan for some time. However, not all banks or all financial institutions provide such facility, but some do. You can inquire about this facility from your bank or financial institution before applying for a gold loan.

How to get gold loan?

You need to carry your gold (gold coins, ornaments or biscuits, whatever it may be) while applying for a gold loan. After this, the employees of the bank do the valuation of your gold. However, during this pandemic like Kovid-19, some NBFCs and banks are sending their executives to the applicant’s home itself. These executives appraise the jewelery at your doorstep and complete the loan process after collecting the necessary documents. Apart from this, you can also apply for gold loan online on the bank’s website.

What are the documents required for gold loan?

You will need Aadhaar card or PAN as proof of identity to apply for a gold loan. For address proof you need to provide electricity bill or telephone bill. Apart from this, you will also have to provide your photographs. If the bank or the lending institution says, then you may also have to give your income proof.

What are the charges to be paid for gold loan?

Some banks charge a processing fee of up to 1.5 percent plus GST on the loan amount. You have to pay this amount before getting the loan amount. Apart from this, banks also charge valuation fees. This fee is taken by the banks in lieu of extracting the value of your gold.

What happens in case of non-payment of gold loan?

If you fail to repay your gold loan on time, the bank or lending institution sends you a follow-up reminder and charges late payment fees as a penalty. Most banks charge a late fee of 2 percent per annum in addition to the interest rate.

If you do not repay the loan despite reminders, then the lending bank or financial company becomes legally entitled to your pledged gold and they can confiscate it. Banks or financial institutions can auction this gold to recover their dues. This has a negative impact on your credit history and CIBIL score.

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