c





 
u

  
 








You may ignore the sparkle of the yellow metal itself, but it is really difficult to
overlook the glitter of gold loans these days. In fact, spurred by soaring prices,
rise in consumerism and, more importantly, changing social norms, gold loans
have not only seen an unprecedented rise in recent times, but are also all set to
shine more brightly in future.

Sample this: The organized gold loan market in India, pegged at 25,000 crore in FY
2009, grew at a compounded annual growth rate (CAGR) of around 38% between
FY 2002 and FY 2009 and is expected to grow at an annual rate of 35-40 % over
the next three years to reach a portfolio size of 50,000-53 ,000 crore by FY11. This
study by ICRA Management Consulting Services alone is enough to set the alarm
bells ringing for those in the pawn broking business. The reasons for this kind of
growth in gold loans, however, are not far to seek.

 


 


Firstly, it is convenience. ͞The sheer convenience of a loan proposition against
such a liquid asset suits both the lender and the borrower. In some cases, it may
be the last resort for the client, but it is a convenient one. Lenders find it a
timeless, good business model, while clients, who need money quickly, find this
the best way to raise funds,͟ says Jayant Manglik, president of Religare
Commodities.

Secondly, it is Y
 . In fact, borrowing against gold is fast emerging

as the most preferred financing option as the interest rate charged by institutions
are less compared to other retail loans such as personal loans. For instance, the
rate of interest on these loans is between 10% and 24% per annum.
In comparison, personal loans charge 16-26 % per annum, depending on your
credit profile.

 


 

  
Therefore, ͞it is better to take a loan against gold than a personal loan as the
rates will be lowerͶsince this type of loan is secured. Another good reason to
take a loan against gold is that most banks/NBFCs allow you to pay only the
interest on the loan monthly and the principal payment at the end of the term
and not as an EMI; which works better from an interest perspective,͟ says Lovaii
Navlakhi, managing director & chief financial planner, International Money
Matters.

Besides, you can decide the approximate loan amount based upon your gold
value, i.e. no income proof is required unlike in a personal loan where the loan
amount is decided based on your income proofs provided. The processing of the
loan is also much faster because of easy documentation. Banks such as ICICI Bank
and HDFC Bank may ask for your ID and other personal details which can take up
to an hour while non-banking finance companies such as Muthoot Finance or
Manappuram Finance claim to process the loan in a few minutes.


 
  




Also, instead of keeping gold idle in a locker at home or in a bank͛s locker, ͞it is a
good idea to borrow against it at lower rates in comparison to other retail loans.
Moreover, lenders also prefer this route of financing as the default rate is
negligible. In general, the loans may be provided for 70-85 % of the value of gold,͟
says Amar Ranu, senior manager, Motilal Oswal Securities.

Added to these is the fact that pledging gold is no longer considered a taboo and
disgraceful in Indian society. This explains why gold loans are now widely
recognized as acceptable means of raising funds for meeting urgent requirements
by all segments of society. Some people also go for it because they find it more
private than going to a neighborhood moneylender. Also, with gold prices soaring,
even banks have begun to push customers toward gold loans. The transactions
have become more popular as small personal lending dries up because of rising
defaults on risky loans.

 
  
 
This is, however, not to suggest that you should throw all caution to the wind
while opting for a gold loan, as the chances of losing your family heirlooms are
higher in case of a dispute or default. That is because gold loans are secured
loans. So if you fail to repay the loan within the stipulated loan period, a higher
interest will be charged and the gold may even be auctioned off.

͞Typically jewellery is an item of personal use and its emotional value is sometime
far higher than its market value. If for any reason you are unable to pay pack the
loan, the lender can sell your jewellery in the market to recover its dues after
which you can never get your jewellery back,͟ says Harsh Roongta, CEO,
Apnapaisa .com, a price & features comparison engine for loans, insurance and
investments.



  
  

This goes without saying, therefore, ͞if you need money quickly and don͛t have
any other assets to pledge, this is a useful avenue. But if you don͛t have the
confidence of returning the principal and interest in time, then you should avoid
taking a loan against gold.͟

Also, gold loans are good in a rising market. However, if gold prices correct
drastically during the loan tenure, banks may ask for the payment of the
difference.

Thus, even availing a gold loan is not without risks, which explains why you need
to mull the pros and cons of pledging the yellow metal carefully and also look for
some other options available before going for a gold loan. It also makes sense to
consider in what circumstances you should go for it and when to avoid it.


 




In normal circumstances, for instance, if your credit history is bad or completely
beyond repairable inner future, you can think of availing a loan against gold, that
too at a discounted rate in comparison to personal loans. Customers with low or
understated income can also avail a loan against gold.

However, ͞if you take a loan against gold for personal expenses such as a 3D TV,
car or foreign trips, then it is quite possible that you may default on the loan.
Also, a gold loan is not recommended for people with low financial IQ because
there is a —
— of default and your     off.͟

Normally, one does not plan to pledge one͛s jewellery to take a loan. ͞Obviously,
if you possess the jewellery for a specific purposeͶto gift to your daughter, for
exampleͶyou are unlikely to sell it. Economically, however, if the expected
appreciation in value is greater than the cost of the loan, it is better to take a
loan. But the period for which you propose to borrow should be —  
   , and you should —  —
—  Y of being able   the
loan on time.͟

It is, however,     



Y if you wish to use these funds
for instant gratification or speculative investments. In that case it is advisable to
just look for some other options!


  

JÊ Go for a gold loan only if you are looking for emergency funds and don͛t
have any other option. 
JÊ Customers with bad credit history, low or understated income can also go
for it. 
JÊ Avoid a gold loan in case you are unable to repay the loan or are likely to
default on repayment. 
JÊ Avoid it if gold prices are likely to correct drastically during the loan tenure. 
JÊ Don͛t use the funds for instant gratification or speculative investment¦