Should you opt for gold loan from a bank or an NBFC?

Planning

oi-Roshni

By Roshni Agarwal

Published: Wednesday, January 15, 2014, 11:46 [IST]

The question that first arises when seeking a gold loan is why gold loan, when you can avail of funds through other financing options without the need to place collateral with the financial institution? It is the convenience and ease with which such loan is processed and disbursed that scores over other loan options that instead being available at a comparably cheaper rate require stringent screening by the authorities in respect of eligibility criteria as well as due diligence.

The reason for easy disbursal of such a loan is that being a secured loan financial institutions have the option of liquidating gold jewellery or coins kept as collateral in case the borrower defaults on interest and principal payment while this option is not available in other financing option that are not secured. So, with this option in hand, NBFC relax the due diligence process and at the same time banks also do not exercise stringent scrutiny.

Now, when the reason as to how the gold loan scores over other loan options is known, the concern is whether it should be procured from a bank or an NBFC. Below are few considerations that should be kept in mind before making the final decision.

Eligibility criteria: While NBFC offer gold loan without any strict scrutiny, banks do not have same leverage and require you to fulfill some laid down eligibility criteria together with documentation formalities.

Interest rate: As the cost of funds for NBFC is higher when compared to banks as they secure funds from banks itself, gold loans by NBFC are offered at a higher rate in comparison to NBFCs. To study the comparison of gold loan rates offered in India. Click here.

Loan to value ratio (LTV ratio): Loan to value ratio is the amount tendered by the financial institution as a proportion of the total value of the gold kept as a collateral. Recently, RBI allowed NBFCs to offer a maximum of 75% of the gold value amount from the existing 60%. Bank offers an LTV of 80-85 per cent.

Loan Repayment schedule: As per RBI, Gold loan should not be made available for a tenure of over 12 months. For NBFCs, interest is to be on a regular basis and principal towards the end of the loan tenure. In case of banks, as per the recent provision by the RBI, though interest for the loan will be charged on a monthly basis, bullet repayment against gold loan is allowed. So, the borrower will have the obligation to pay both the principal and interest amount only at loan maturity.

So, in case you are not in dire need and could wait for 2-3 days time that banks usually take in disbursing loan against gold jewellery, you can definitely opt loan against gold from banks with several advantages of lower interest rate charges, higher loan to value amount, bullet repayment option. However, in the other case of urgency when you need quick funds, gold loan from NBFCs for a short tenure of 1 year will not make any major difference in the cost of borrowing funds.

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