How to get the most out of gold loans? Key things to consider before availing one

Financial emergencies can come in at any time, without any prior notice. You can suddenly find yourself in a situation where you require a large sum of money, and you are not able to arrange it through any other means. In such situations, gold loans can be a great option to consider.

Gold loans are unique in the sense that they are backed by the gold that you are providing as collateral. The loan amount and the interest rate of the loan are determined based on the market value of the gold that is used as collateral. Gold loans have become very popular in India, mainly for the fact that they are easy to avail, and the processing time is very short.

What is a gold loan?

A gold loan is a type of loan where the borrower pledges their gold as collateral in order to secure a loan from the lender. The loan amount is determined based on the market value of the gold that is pledged. The borrower is then required to repay the loan amount along with the applicable interest rate over a specific period of time.

READ MORE: Gold loans: What is LTV ratio and how does it affect your loan amount?

The gold that is pledged is kept in the safe custody of the lender. The lender may also charge a processing fee for providing the loan facility. Gold loans are usually short-term loans, and the repayment period is usually between 3 to 12 months.

Pros of taking a gold loan

Quick and easy to avail: One of the main advantages of taking a gold loan is that it is very easy and quick to avail. The processing time for a gold loan is usually very short, and you can get the money within a few hours.

High loan amount: Gold loans offer higher loan amounts than other loan types. This is because the loan amount is based on the market value of the gold that is pledged as collateral. Borrowers can access larger sums of money, often up to 80% of the gold's value.

READ MORE: 10 reasons why borrowers prefer gold loan in India

Low-interest rate: Gold loans generally offer a more affordable interest rate than other forms of financing. Typically, the rate of interest for gold loans lies between 10-15%, depending on the lender and the quality of the gold being used as collateral. This relatively low rate of interest makes gold loans an attractive option for borrowers looking for a cost-effective way to access quick cash.

Cons of taking a gold loan

Risk of loss of gold: While these loans come with great convenience and flexibility, there is a risk of losing the gold if the borrower is unable to repay the loan. The gold is kept in the custody of the lender, which means that it can be lost, stolen, or damaged.

High processing fee: Gold loans also come with a high processing fee. The processing fee can be as high as 5-10% of the loan amount.

Low liquidity: Gold loans are not very liquid, as the loan amount is usually fixed. This means that once the loan has been disbursed, the borrower cannot increase or decrease the loan amount.

Things to consider before availing a gold loan

As you understand the pros and cons of availing a gold loan, here are some points to look out at before availing a gold loan.

1. Check the market value of the gold

Before taking a gold loan, it is important to check the market value of the gold that is being pledged as collateral. This is important as the loan amount and interest rate will be determined based on the market value of the gold.

READ MORE: Gold loans vs personal loans: 4 factors that affect your choice

2. Evaluate the interest rate and repayment options

It is also important to check the interest rate and the repayment options that are being offered by the lender. Different lenders may offer different interest rates and repayment options, so it is important to compare different lenders before taking a loan.

3. Check the processing fee

It is also important to check the processing fee that is being charged by the lender. Different lenders may charge different processing fees, so it is important to compare different lenders before taking a loan.

4. Check the security measures

It is also important to check the security measures that are being taken by the lender to protect the gold that is being pledged as collateral. This is important to ensure the safety of the gold.

Taking a gold loan can be a great option in times of financial emergency. However, it is important to keep the above-mentioned points in mind before taking a gold loan. Comparing different lenders and understanding the terms and conditions of the loan is important to make sure that you are getting the best deal.