Many banks today have started taking advantage of India’s cultural obsession with gold and now offer ‘Gold Loans’, where the bank will give you a loan based on the amount of gold that you can pledge.
This isn’t anything revolutionary, given that gold loans were how an entire sector of informal money-lenders operated, but an institutionalised gold loan offers greater security for the borrower, apart from several other advantages.
How do gold loans work?
Customers who wish to avail gold loans will have to physically take the gold that they intend to pledge to the bank where it will be valued, after which the banker will inform you about the amount of money you are eligible to borrow.
The loan amount that the bank will be ready to give will usually be around 60-80% of the gold that you have on hand.
Gold bars and biscuits will get you maximum mileage whereas gold jewellery will fetch you less (which is why I thoroughly dislike the idea of hoarding gold jewellery as an ‘investment’) because of the weight loss that is caused by its designs. The loan value will also depend on the purity of your gold.
A blessing for women during emergencies
Gold loans are a blessing for women, especially during times of emergency and distress because they are processed very quickly. It only takes a day, or perhaps two, for the money to get credited into your bank account once your gold has been valued. The documentation is mostly painless and only requires identity proof in most cases. You might be charged a ‘valuation fee’ but rest assured that it will be nominal.
Gold loans vs personal loans
Gold loans are a far better option than personal loans for women for a number of reasons.
Personal loans, which are disbursed by the bank without any security on part of the borrower, require the borrower to jump through multiple hoops by way of processing fees, tedious documentation, requiring a guarantor, submitting multiple proofs of income and so on before the money is credited to your account. After all, the bank must ensure that you pay the money back to them!
Gold loans on the other hand are quick because the bank already has a security in its hands.
Personal loans also come with heftier interest rates (in the whereabouts of 14-22% per annum) in comparison to gold loans (11-14%).
Another advantage is that gold loans allow the borrower to pre-close the loan with minimum penalties. Personal loans are harsher on pre-closure, requiring the borrower to pay up to 3% of the loan value as penalty.
Gold loans are also given for shorter durations in comparison to personal loans, which are usually given for around one to three years. It is possible to take a gold loan even for a specific number of days (you will only pay interest for the number of days that you have borrowed the money for), making it a perfect solution for emergency situations.
Do remember though, that in the case of non-payment, the bank has the right to sell your gold.
Going for gold
The reason I recommend gold loans for women isn’t just because of the lower interest rates or quicker processing times – it is also because gold is easier for women to access. We wear gold and on most days, we have easy access to whatever gold that we have bought or our parents have given us. Institutionalised gold loans also mean that women don’t have to subject themselves to the moods of moneylenders and can get money in a secure manner.
So the next time you find yourself in a sticky situation that requires money, just look to your locker.
Rupee Rani is a weekly column on finance for women. Write to us with your queries at firstname.lastname@example.org.