Most precious metals and jewelry are traditionally considered as good as cash, if not better. And among all of them, gold is considered to be the most sought-after and persistent de facto currency. Come rain or shine, the importance of gold does not fade.
And in case you get too attached to your gold jewelry, you can mortgage it for a loan offered at a modest interest rate – rather than sell it.
Interest rates charged on gold loans by NBFCs such as Muthoot Finance are different from those charged by commercial banks. Muthoot Finance, for example, charges a rate that starts from 12% per annum, while Manappuram Finance charges 9.9% and IIFL’s interest rate starts from 9.24%.
Why Gold Loan?
Pursuing a gold loan has some advantages over a personal loan. The first and most important is that the loan is available for a lower interest rate compared to other unsecured loans such as personal loans. Another reason is that it can be used by anyone and everyone.
“What sets gold loans apart is the fact that you don’t need a credit score to apply for these loans. Even a student can take out a loan if they don’t have proof. income, such as a payslip,” says Delhi-based chartered accountant and financial adviser Deepak Aggarwal.
Banks charge lower rates
Banks usually charge a slightly lower interest rate on gold loans. For example, HDFC Bank charges 9.9%, ICICI Bank charges an interest rate of 11% per annum and Canara Bank charges 7.65% while SBI charges 7.5% per annum.
Another difference that can be noticed between the two categories of institutions is the loan amount and processing fees that one has to pay.
Example: Muthoot Finance offers loans for an amount as low as ₹1,500 while the processing fee is between 0.25% and 1% of the loan amount. Similarly, Manappuram Finance offers loans from ₹1,000 and charges a negligible processing fee.
However, banks tend to charge higher processing fees and the loan amount is also higher at the same time.
For example, HDFC Bank offers a gold loan for an amount greater than ₹25,000 and levies a 1.5% processing fee, Axis Bank’s minimum lending threshold is ₹25,000, or ₹10,000 for ICICI Bank.
It should be noted that the banks’ gold loan portfolio increased by more than 89% year-on-year to reach ₹60,700 crores in FY21 and ₹70,900 crore in the first nine months of FY22, according to the India Ratings and Research report.
Additionally, the rating agency said NBFC gold loan auctions rose in April-December FY22 – the highest since FY14 when gold saw a higher price volatility.
However, it is essential to mention that a borrower can lose the jewelry if he does not repay the loan. And the value of the jewelry is usually much higher than the loan taken out. You can only get 75% of the value of the jewelry. Add to that the manufacturing costs.
So what you end up receiving would be far less than what you spend on your gold jewelry.