Gold Loans Not All Are Actually Cheap

Recently one of my office colleagues took up the offer of free financial plan that we offered to our own staff members. After the data gathering exercise was over we realized she had taken a gold,loan,from a neighborhood co-operative bank to fund the down payment requirement on the house that she had recently bought. What was surprising was that she was paying an effective interest rate of 41% p.a. on this fully secured loan. To add insult to the injury, that co-operative bank had also taken a lien on her,life insurance policy
which had a surrender value that was about 25% of the loan value.  She had sought our assistance while taking the home loan but had not mentioned about her issue with raising the down payment. When we asked her why she decided to take the gold loan from that particular lender her answer was illuminating (and I hope somebody from the burgeoning gold loan industry is also reading this).

Firstly she knew somebody in the bank who promised her a loan fairly quick (it actually took 12 days but it was the promise from somebody she knew that drew her in the first place). Secondly of course since the repayment was in EMIs, she did not understand the fact that the actual interest rate was as high as 41% p.a. Thirdly, she did not mind providing the additional security of her,life insurance,policy since it was anyway lying around in her cupboard. And perhaps the clincher was the inherent assurance that she could get her precious jewelry back across the counter as soon as she repaid the entire loan.

Now most financial planners (including Apnapaisa) recommend taking gold loans (of course only when taking a loan is absolutely essential) as they are economically priced, available quickly irrespective of your credit history or age or income and can be prepaid as and when you have additional funds without (normally) attracting any pre-payment premium.

My colleague’s case outlined above made me rethink this. Sure gold loans can be economical and convenient. But in the hands of formal sector loan sharks (like the one my colleague encountered) even these loans can be exorbitantly priced. So how do you ensure that when you need a gold loan you get an appropriately priced offer?

Firstly do not take any offer from any bank or Non Banking finance company that provides only EMI but does not confirm the interest rate in writing. Secondly remember lower the loan amount that you take against the same jewelry lower will be your interest rate, which in the same lender can vary from 12 to 24%. Here is an example that will illustrate this point. Suppose you have jewelry with a sale value of Rs. 1 lakh and are looking for a loan of around Rs. 50,000. So essentially you are looking at a loan of 50% of the value of your jewelry. This should come fairly cheap at around 12% p.a. whether you take it from an NBFC (companies like Mannapuram, Muthooth, etc.) or private banks (HDFC Bank, ICICI Bank, etc.) or a PSU bank. Now the lenders would perhaps be willing to lend you as much as Rs. 80,000 against the same jewelry but it would come at a stiff cost of around 18% – 24%. So if you need a higher loan amount it might be cheaper to provide additional jewelry as security rather than pay a higher rate by taking a higher amount of loan against the same jewelry.
There are various lenders in the market who offers good gold loan offers on interest rates for gold loans. Details of some of the best deals are in the table below

Name of the Lender
ROI (%)

Max Loan Amt

Tenure

Muthoot Finance
12.0

1,00,00,000

Manappuram Finance
12.0-24.0

1,00,00,000

Federal Bank
12.75

75,00,000

Up to 12 months

Central Bank of India
13

10,00,000

12 36 months

HDFC Bank
11.25-14.25

10,00,000

Canara Bank
13.25

200000

Up to 24 months

Syndicate Bank
11.75

500000

Up to 24 months

Remember just like all that glitters is not gold similarly not all gold loans are necessarily cheap.

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