Investments are an old tradition in India. Whether they refer to the older generation or the current one, every person believes in investing their money and assets to earn decent returns. They plan a lot for financial security in the future and believe in saving as much possible. The higher the investments, the better the returns.

A gold loan is a loan against the physical pledge of gold. It can either be in the form of gold bars or gold ornaments. There is a complete assessment done by the bank/financier before approving the application. They are one of the quickest and simplest ways to monetise gold and get money. Apart from banks and local jewellers, many NBFCs also specialise in giving loans to retail customers.

Here are four aspects to consider before opting for the loan:

1. Know the loan amount applicable: The loan amount depends on the value of the gold. The bank or financier considers an equivalent of 22-carat gold. Banks give loans to the extent of 70 per cent of the market value of the assessed quantity of gold. They do not insist on any income documents except for the PAN card and Aadhaar card. Some lenders consider the daily price of gold, whereas others consider the weekly or fortnightly average amount. 

2. Bargain for the best interest rates: Usually, the interest rate on loans against gold is comparatively lesser than personal loans because they are secured. NBFCs charge a higher rate of interest compared to banks as they have a higher cost of funds. Ideally, if investors have an existing relationship with a bank, they can get gold from the same bank with better terms. The gold loan interest rate varies between 13 per cent to 15 per cent in most cases. Avoid pledging gold with jewellers as they may not be very trustworthy. 

3. Short term facility: These loans have tenure for 12 months after which borrowers have to repay the loan amount. Banks may extend the loan period for an additional year based on mutual terms and conditions. Ensure to repay the loan within the time limit. In case of default, the gold pledged by the borrower gets auctioned, and they end up getting an unfavourable rate for it. 

4. Lender’s credibility: The lender will feel secure as they have the gold as security if the borrower does not repay the loan amount on time. However, if the gold pledged value is higher than the loan value without the guarantee of return, it becomes risky. Perform background checks and know the safety measures taken by the lender to safeguard the assets.