“Why does she have to go to pawn broker to give her bangles?  Why doesn’t she go to ATM and draw money?” asked my son. We were trying to introduce our children to classic Indian Movies and had planned Mother India with family friends. “There was no ATM that time”, replied a friend. “These pawn brokers are all greedy people” replied another. “She will never be able to get her bangles back” remarked another. “Even today people do pawn their gold but thankfully there are now banks and NBFC which are not as greedy as money lenders”. Then there were exchange of stories of how their maid,friends,relatives had taken gold loans. A friend explained me about the Flexible Loan which his relative had used for Business Purpose. So I explored about Gold loans and Flexible Loans.

Indians love to own gold  usually in the form of jewellery, coins or bars mostly given during marriage. Gold is not liquidated unless one is in extreme financial need. But, pledging gold ornaments and other gold assets to pawnbrokers and money lenders to avail loans has been prevalent in India for many decades, particularly in rural areas. Now with banks and Non Banking Financial Companies( NBFCs) like Muthoot Finance, the urban people are also availing the gold loans, which has led to growth of the gold loan market in India

Features of Gold Loan

Loan is borrowed against the gold deposited by the applicant. It’s features are

• Multi-purpose : The loan can be used for any purpose, as long as it is not for any illegal activity or speculation in the stock market.
• Low disbursal times : NBFCs and the unorganized sector disburse loans at a much faster pace (as low as three minutes to a few hours) as compared with banks which may take a few days.
• High loan-to-value (LTV) ratios :One  would typically get around 60% of the gold value as loan,
• Shorter loan tenures:  The average tenure of the loan is less than 365 days.There is no minimum period for the loan and, if need be, one can return the loan amount the very next day.
• Varied interest rates: The interest rate depends on the tenure and amount of loan. It varies from 11% to 18% in the case of banks, while for NBFCs, it could reach 24%. The interest rates charged by the unorganized segment are much higher and can range from 30% to 50%.
• Multiple repayment options:  Repayment can be structured as just interest amount with principal being repaid at the end of the period in one lump sum. Repayment through EMI, covering interest as well as principal, can also be an option.
• Documents to get loan : To get gold loan one doesn’t have to show salary slip or have a credit history. Unlike any other unsecured loan, gold loan requires  minimal documentation such as ID proof and address proof.
• Getting gold back: The gold which you pledge is given back to you after the loan and the complete amount has been repaid. Failure to repay the loan results in auctioning off the same.

As it is loan charges associated with the gold loans are as follows:

• Processing charge: While some of the banks and NBFCs  may waiver these charges, some do charge a processing fee.
• Valuation Charge: These are the charges to be paid to the valuator for evaluating the gold. These charges are also specific to the instutions and those having in-house valuators do not charge any extra amount for valuation.
• Late payment penalty: Most of the service providers charge late payment penalty and this too can vary from one institution to the other.
• Pre-payment penalty: Most of the service providers do not charge a penalty for repayment before the loan tenure is over. But some may still have this charge in place.

The one question that plays on your mind when you are hard-pressed for cash is How fast can I get a loan?  Though credit card is an instant option but the credit limit may fall short of your requirement. If you need cash then the cost would be too high. In case of credit card cash withdrawals, the charges are too high plus the rate of interest is minimum 36-48 per cent, which can leave a hole in your pocket.A personal loan takes at least 3-5 days for processing and comes at a higher interest rate. Gold loans are one of the cheaper options compared to a personal loan or credit card.  So getting a gold loan in few hours/a day or two makes much more sense;

Overdraft facility

Overdraft facility  is offered to individuals against assets such as property, securities and life insurance policies, gold.  It almost works like an approved loan. The money is not disbursed to you immediately . As and when you want, you can keep withdrawing money from this overdraft account. You have to pay interest on the money borrowed for the time you have availed it. Many Non Banking Financial Companies (NBFC) also offer overdraft loans. For example  Muthoot Business Overdraft Loan or Flexi Balance Loan can be availed using your gold as collateral and repaid once your finances are back in control.  For more information on Muthoot

Benefits of Flexi Loans are:

• Interest is payable only on the utilized loan amount. There is no interest levied on the pre-paid amount. So one saves on Interest costs.
• You have the flexibility to pre-pay the loan with idle funds.
• You can avail the amount at any time within the loan tenor timeframe .

Though precaution is better than cure and one should have funds for emergencies , we all know how common is common sense. During the discussion I learnt that Gold loans are good bet especially during emergency.  (A friend relative took it for her father’s hospitalization.  )Especially for those people who do not have credit card or poor credit history so they cannot take personal loans. Flexi Balance loans are very useful for small businesses. But please be disciplined and do not use the funds for speculation. Have you availed Gold loan? How was your experience?