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7 Reasons Why Gold Loans Are Good For New And Self-Employed Borrowers

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Gold investment is not new to Indians. Traditionally, the metal is considered auspicious and an asset in times of need.

For a majority of Indians, especially those households that make revenue from farming and other informal segments, loans against gold is a leading source of credit.

Those in work in the informal sector or homemakers, find it hard to seek a loan from large commercial banks due to lack of a continuous income source.

 

Consequently, microfinance lenders, as well as big commercial banks, are tapping the potential of monetizing gold deposited in households through gold loans.

According to a recent KPMG report, India's gold loan market is expected to reach Rs 4,617 billion by 2022 (at a five-year compounded annual growth rate of 13.4 percent).

7 Reasons Why Gold Loans Are Good For New Borrowers

Why are gold loans a good fit for new borrowers, self-employed and those with irregular income?

1. Helps built credit score

When you apply for a gold loan, most lenders do not take your credit score into account as the loan is secured with the jewellery/coins that you deposit with them.

If you are over 18 years of age with a government-issued ID proof and documents to prove the source of the gold you own, you should be able to apply for a gold loan.

If you are a new borrower in the organised sector, the gold loan will help you build a good credit score, if you manage to repay it on time. It will help set a base for any future loan requirements like home loan, vehicle loan or personal loan.

2. Works like credit card

If you are self-employed, run a small business, working in the farming/unorganised sector or stay-at-home parent, it can be difficult to prove consistency in regular income of income to a commercial bank. Gold loans come in handy for such individuals as these are instantly issued with minimal documentation process.

Lenders like Muthoot Finance allow you to borrow as little as Rs 1,500 against the metal, helping you bridge the bridge the cashflow mismatches in any given month until you receive your expected payments.

 

It can help fulfil immediate cash needs like child's education, wedding, medical emergency, etc.

3. Ease access

Thanks to the increased penetration of internet and smartphone use, gold loans can be availed online with an instant transfer to your bank account.

You can walk into a bank branch and deposit gold. The bank or NBFC will credit the loan amount after an online registration linking your bank account. Interest and installment payments, as well as checking of bank statement, can be done online.

4. Increase in gold prices will work in your favour

In the last one year, gold has been one of the best asset classes for having risen in valuation by over 20 percent. In such a scenario, a rise in gold prices is favourable as it increases the market value of the gold ornaments or coins being pledged by you. Lenders will also offer you loans at a lower rate as risks associated with holding them will be lower.

5. Formal sector lending

With an expansion in the reach of formal banking systems, individuals do not have to be exploited by relying on middlemen and informal money lenders. The organised gold loan market comprising of banks, NBFCs (non banking finance companies) and Nidhi companies contribute to nearly 35 percent of the Indian gold loan market.

One can seek loans for Rs 1,500 to Rs 1.5 crore for interest rates ranging between 9.7 to 29 percent and for a tenure of 7 days to 10 years.

Lending from the organised sector assures safe custody of the gold you give as collateral. These institutions also provide free insurance cover on the gold.

6. Overdraft for the self-employed

Those who run businesses often need working capital to meet large or unexpected orders. Gold loans come with overdraft facility wherein money can be withdrawn directly into bank accounts to pay EMIs or any other dues, without any restrictions on the number of times one can borrow.

7. Priority sectors get cheaper loans

Agriculture is a priority sector for lenders in India. Farmers seeking loans to fund agriculture infrastructure and other farming-related activities can also seek rebate of 1 to 2 percent on interest rates.

Some NBFCs also provide cheaper loans against gold to women.

Disclaimer

The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

About the author

Olga Robert has been covering equity markets and personal finance for over two years.

Read more about: gold gold loans
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