Our country is one of the largest consumers of gold, as the metal holds specific sentimental value for all Indians. The concept of pledging gold for emergency funds has been around for centuries.

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It is one of the easiest and fastest ways to access funds when it matters the most. Even small-scale businesses have been using gold loan schemes to fund operational requirements.

The demand for loans on gold has been increasing over the years. In the last year, the need for gold loans has grown in response to the economic impact of the Covid-19 pandemic.

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Even businesses, be it large or small, have been using gold loan schemes to fund operational requirements.

The entry of banks and non-banks into the traditional gold loan domain has made it a more formal and transparent process vis-à-vis money lenders. Applying for a gold loan has become easy, and disbursal against the collateral has become faster.

Though it has several advantages, one must borrow credit against gold from a reputed lender. Before pledging the owned gold against the credit, it's vital to go through certain mandatory checks that could help ease the overall process and simplify loan repayment.

Ravish Gupta, Business Head - Gold Loan, Capri Global Capital Ltd decodes what is a gold loan and the nuances one should know before opting for a gold loan:

How does it work

A gold loan is a secured loan that a borrower opts against gold ornaments at affordable interest rates from a lender. The loan amount sanctioned to the borrower is generally a certain percentage of the gold's value, typically 65 to 75 percent, based on gold's current market value and quality.

It means that if the overall value of the gold is INR 20 lakh, the borrower can avail loan amount between INR 13 lakh to INR 15 Lakh. It is a short-tenure loan, and the borrower can repay it through monthly installments.

After completing the credit and interest payment, the borrower gets back the gold articles. There are several banks and financial institutions that provide gold loans in India.

Before applying for it, customers should compare different lenders that offer gold loans and choose the one that suits their requirements, such as lower interest rates, adequate loan-to-value ratio, flexible tenure, etc.

Myths vs. facts

Many myths are associated with a gold loan that discourages individual borrowers from opting it out at the time of the need. The most deep-rooted myth is only jewellery makers and shop owners offer it.

Today, the banks and NBFCs have ventured into the gold loan market, which is more secure and systematic. Additionally, the borrower gets a lower interest rate than other available lending options.

Secondly, people are often scared about their gold articles being stolen or replaced with fake lookalikes. The reputed financial institution stores the gold articles under vaults with robust security arrangements. They also offer a safety guarantee to the borrowers.

People also feel sceptical about taking the loan against their ancient gold articles. The government has issued guidelines regarding the quality of the gold articles.

The only determinant the lender looks for is the purity of gold against which the sanctioned amount gets disbursed. The gold article must be of at least 18 Karats as per the guidelines.

Lastly, the borrower thinks that the gold loan process is complicated and time-consuming, contradictory to which it has a swift processing time. Often the gold loan gets approved and processed within the same day.

Know the nuances before opting for a gold loan:

Gold loan is also known as ATL, which means anytime liquidity. The borrower can avail gold loan within 30 minutes without excessive documentation and formalities.

The loan offers a better loan to value ratio (LTV). Being one of the high valued commodities in any market, the LTV is always high, ensuring that the borrower gets the best value for their asset.

The borrowers can avail of the loan against their gold through an easy and minimal documentation system. Generally, the lender does not inquire for income proof as the loan amount is secured against the article.

Hence it is one of the most viable credit options for borrowers. Unlike unsecured loans, a gold loan doesn't require any credit history.

Additionally, the borrower can repay through different types of schemes. The borrower can opt to pay the interest amount on a monthly/quarterly basis and then pay the principal amount at the end of the loan tenure.

The borrower can also pay the principal amount and interest through regular EMIs. The loan also offers advanced interest payment (pay entire interest amount upfront and principal amount at the end of the tenure) or bullet repayment (pay both principal and interest amount at the end of the term).

Simplified process

The borrower can avail gold loan by following six steps: gold loan application, gold submission, evaluation, documentation, authentication, and repayment.

Some shortcomings the borrower should know

It is essential to know and understand the repayment clauses. If the borrower defaults on loan repayment (full or partial), the lender has the right to sell the gold article and settle the loan amount.

Due to the volatile price fluctuation and the lender offering the loan at the current market rate of the gold price, the borrower may get a lower loan amount sanction against the borrowed price of the gold article.

While the lender does not check credit history at the time of gold loan sanction, the missing payment cycle affects the borrower's credit history.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)