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Should you opt for a Gold loan?

Two days back, a news about ‘auction’ of pledged gold worth crores came in! Around 1 lakh people who applied ‘gold loan’ couldn’t pay off their dues & so respective banks & NBFCs had to ‘auction’ the gold pledged.

We are still fighting with Covid 19 & our livelihood is still under its shadow. Lakhs of people who are small businessmen, entrepreneurs hit hard due to this pandemic & lockdown. Many people faced huge amount of hospital bills to pay off.

For them, Quick & easy resort to pay off the running costs was ‘gold loan’. They opted for it, but due to slow recovery of the economy, restrictions by the respective governments on the operating hours of businesses, job losses they barely managed to pay off the loans.

This resulted in ‘auction’!

Now the question arises, should we really apply for gold loans?

What is gold loan?

Gold loan as the name suggests is applied for by pledging the gold that a person possesses. Gold is everyone’s favorite. Every household possesses quantum of gold which they fondly purchase to make jewelry or as an investment or to give as a gift.

This gold can be pledged to get a loan against it.

Who offers gold loan?

Banks & NBFCs i.e. non-banking financial companies offer gold loans.

How it works?

Gold loan is generally offered @75% to 90% value of the gold to be pledged. Respective bank or NBFC make valuations & then the amount of loan is decided.

While making valuation, bank or NBFC checks purity & weight of the gold. Based on the market value of the gold, the amount of the loan is decided.

How much is the Interest rate & how long is the tenure of the gold loan?

It is offered for a tenure of 3 months to 24 months. Depending on the case, some lenders offer even a longer tenure too.

Interest rate varies from lender to lender. It is a ‘secured loan’ so rate of interest is lower than any personal loan.

How to repay the gold loan?

Like any other loans, one can pay the loan via EMI i.e. equated monthly instalments. It includes interest & principal component both.

Should you opt for a gold loan?

It is case sensitive. Gold loan has features like-

  • It is a secured loan
  • Process to apply is quicker.
  • One can opt to repay the loan even early
  • It is used to fulfill the urgent need of money.
  • Not only physical gold but you can also pledge your digital gold like Sovereign gold bonds.
  • It doesn’t consider applicant’s CIBIL Score

But having said that, it’s a loan at the end. Though you get it quickly, this doesn’t mean you should rely on the same always.

For a person whether a self employed or a salaried, emergencies can come anytime.

Banks & NBFCs see surge in gold loan applications during economic downfall or when a person faces need of money.

But while applying for a gold loan, one should check the following-

  • Repayment capacity:

Please note that the rate of interest can be high & tenure of loan can be shorter. This increases the amount of EMI. If you notice urgent but short-term requirement of the fund, expect future payment receivables then you can opt for it. Repayment of EMI is very important otherwise your gold will remain with the bank & ultimately get auctioned.

  • Terms & conditions applied:

To avoid auction or non-payment of EMIs & dues, one should check terms & conditions applied. Often the clauses explain terms related to non payment of dues which a person should understand while applying.

What is the alternative?

Gold loan is widely considered as a way to get quick money by pledging the gold that a person owns. It is used to make payments that are urgent & need to be made quickly.

A person, when face any such situation, can consider & rely on the ‘emergency fund’.

Emergency fund is meant to pay off the dues in any emergency situation be it for a business or a personal reason.

One should do the following to create emergency fund-

  • Please calculate monthly expenses for your household & business. Calculate them separately.
  • When you arrive at these two amounts, multiply them with 18 & 24 respectively.
  • This means for your personal use to pay off your personal & family household expenses, you get the amount equivalent to 1.5 years of expenses & for your business activity, you get the amount that is sufficient to pay off your business-related expenses for 2 years.
  • When you face any emergency, just check the balance in your emergency fund to pay.

Where to invest emergency fund?

You can invest the corpus in short term bank deposits, debt liquid funds or a part of an be kept in your bank a/c. The break-up of the amount you can decide based on your needs.

Three things to consider about the emergency fund:

  1. Emergency fund should be invested in instrument which you totally understand about, can transact easily & money can be made available quickly to you.
  2. One should not ‘seek returns’ from this investment & invest in riskier one like equity. The purpose to create & maintain this fund is altogether different.
  3. Please utilize this corpus when you ‘really need it’. Don’t touch it unless & until you need the money & you face real emergency.

Creating & maintaining emergency fund can help us stay away from any kind of ‘loan’. Gold loan though is simple & quick, ultimately demands regular payment of EMIs. Gold which one purchases with ‘emotions’ should be returned back to its original owner ultimately.

To avoid auction or difficulty in repaying the loan, one should first consider ‘creating emergency fund’.

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