Know how gold loan works

Know how gold loan works


In a Gold loan, the borrower provides a bank or financial institution with 18K to 24K gold as collateral and receives a loan against it. A gold loan may be compared to a “mortgage loan,” where the owner retains their home or property as a mortgage with the bank and obtains a loan against it to meet their capital needs.

What Is a Gold Loan?

Due to the fact that banks do not have to worry about non-performing assets, a gold loan is among their most lucrative (NPAs). This is because even if the borrower fails on their monthly instalment payments (EMIs), the jewelry obtained as collateral stays with the bank.

A gold loan works like this:

In the initial phase of applying for a gold loan, a financial institution checks the purity of the gold jewelry that is being used as collateral together with the value of the gold jewelry.

The Reserve Bank of India (RBI) mandates that banks execute KYC checks and regulations in which the bank learns about its customer’s identification, credit history, the reason for asking for a loan, and other relevant information.

The conditions of the Gold loanare agreed upon by both the financial institution and the customer after the quality and worth of the jewelry have been established and the KYC process has been completed. The borrower’s account is credited with the agreed-upon amount when the loan is authorized. The whole procedure may be performed in a few hours.

What are the benefits of getting a line of credit against your gold?

  • Inflationary pressures on the economy

The purity of gold affects the interest rates charged on gold loans and Gold loan calculator consider all these things. The greater the gold’s purity, the more money you’ll be able to borrow against it. In the public sector, interest rates range from 8 percent per year to 18 percent per year, while in the private sector they might reach 24 percent per year.

  • Loan-to-value and haircuts (LTV)

Banks are allowed to lend up to 90% of the gold’s value, which equates to a minimum 10% haircut, according to the RBI’s norms. Banks have a 35 to 45 percent profit margin on loans with a loan-to-value ratio of 55 to 65 percent, making it the safest kind of credit for them.

In addition, Loan to Value ratio (LTV ration) refers to the amount of money a client will get in exchange for the value of the gold they have. Customers may borrow up to INR 6,500 if they have an LTV of 65 percent and the value of the jewelry is INR 10,000.

  • Tenure

Short-to-medium-term loans, such as a gold loan, often have terms of six months to 24 months. As a result, it is not suitable for long-term borrowing. The Gold loan calculatorconsider all the necessary thing and then give the results out.

  • Even those with poor credit may get a loan.

As there is a collateral for the loan, the bank is confident that it can lend to the person, even if they have a low credit score.