Many people have plain gold articles lying around in lockers at home or saved in vaults at banks. While gold is an asset that gives zero returns and investing in gold may often be a waste of time for some, having gold on your portfolio is added benefit. Even though one does not earn profits on their gold, the asset has umpteen financial benefits that could always prove useful in times of emergencies or turbulent economic conditions.
One of the underrated benefits of gold is that one could get secured loans by depositing gold, as collateral, with a bank or other lenders. When times are good, and economies are prospering, investors experience highs and often, in their mode of celebration and joy, forget to plan or make provisions for times during weak, flagging economies. They fail to take into account crises and emergencies, leaving themselves unarmed in the face of a recession.
In such cases, when you are experiencing a cash crunch, or inflationary pressure has caused a liquidity crisis, gold is a beneficial asset. With your gold holdings, you can take loans from gold loan lenders or sell you gold at a high price, depending on your cash flows and future needs.
Below we discuss the various advantages and disadvantages of taking gold loans. With the current fluctuations in economic policies, due to the global pandemic, and the urgent need for cash, if you are considering taking a loan, you may want to read over the following for a better understanding of gold loans and more appropriate use of your finances and assets.
Gold loans are similar to personal loans in every aspect. Whether you are borrowing to spend on education abroad or covering medical or emergency expenses or even putting together cash for wedding expenses, like personal loans, gold loans can be used to fulfill all your immediate financial requirements. However, there are numerous advantages of taking a gold loan over a personal loan.
- Swift Loan Disbursal
With gold loans, the process is rather simple and efficient. The lack of endless documentation and quick processing allows for a swift disbursal of your loan. As loans are generally taken in emergency cases or when experiencing a severe cash crunch, cash is essential and timely disbursement appreciated, saving you time and the pressure of insufficient funds and resources.
- Flexibility of Use
As the use of the loan is not monitored, you have the leverage of using your gold to fund any expenses you may have. You may choose to pay for a course abroad, invest in real estate, or even cater to wedding celebrations. With the loan, you have complete discretion of its use and may choose to use it for anything you possibly need cash.
- No Credit History Required
Unlike with personal loans, where the loan amount is sanctioned based on your ability to repay the lender and your credit history, gold loans require no credit history of the borrower. Banks will not check your credit or CIBIL score, and you will not have to declare your debt obligation or the existing loans you have issued. Moreover, you will not have to provide any proof of your income or any such details. As the loan is secured against gold, you will have to deposit it as collateral and have your loan issued in your name.
- Low-Interest Rates
As compared to unsecured loans, gold loans charge a significantly lower rate of interest. Depending on the loan’s tenure, unsecured loan interest rates usually range from a small 5% to a soaring 36%. Interest rates on gold loans, however, vary between 9.45% and 26%. A significant sum of money is saved on interest payments when borrowing gold loans, as opposed to unsecured personal loans.
- Zero Processing Fees
In banks, generally, zero processing fee is charged to issue a gold loan. However, other lenders may charge a minimal amount of a 1% processing fee, including additional charges. This is not a significant sum of money compared to a personal loan processing fee, which is about 16% FED charges, distinct from a 1% fee on the value of the loan, charged subject to the approval of the loan.
After detailing a list of advantages of issuing gold loans, we will now discuss some significant problems with secured loans.
- Loan-To-Value (LTV) Ratio
The loan amount, against gold, sanctioned to borrowers is based on the LTV ratio. This ratio varies from lender to lender and can go as high as 80% of the gold value, but is usually placed at 75% of the gold value. The disadvantage is that while banks offer you 75% of the value of your gold, they keep the remaining 25%. This goes towards the bank’s margin and cannot be monetized, resulting in a 25% loss, to the borrower, on the value of the gold.
- Risk of Liquidating Asset
As loans are only taken in emergencies when individuals are short of money or experience a liquidity crisis, they may find it difficult and challenging to repay the full amount of the loan. In such cases, even though gold loans have relatively flexible repayment methods, the borrower may be at risk of getting his/her gold liquidated. If you cannot repay the loan in time, the lender will liquidate the full amount of your gold asset.
- Short Tenure
With gold loans, a majority of lenders provide credit for a short period. Gold loans are usually not issued for anything more than a three-year tenure. This may be a significantly short period for those wanting the loan for more extended periods – such as in the case of weddings.
With the finer details provided, on gold loans, above, accompanied by your thorough research and an adequate gold saving plan, you may consider opting for a gold loan. Depending on your financial situation, your cash flows, and your budget, you can weigh the pros and cons and choose between a personal, unsecured loan or a secured gold loan.