Is gold a good mortgage asset?

Recent spurt in gold prices has spruced up the value of the yellow metal further.

Not only is it providing golden returns but is also helping get good mortgage value.

In a high interest rate regime when all banks are offering loans at a lofty price, rates for loans against gold continues to be cheaper.

Many leading gold loan providers in India are now offering discounted rates along with other additional benefits.

One can now avail a loan up to Rs. 1 crore against gold.

They are also offering loan amounts ranging from Rs. 1,305 - 2,025 per gram of gold. 

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Evidently rates offered by gold loans are far cheaper than a personal loan. Let's compare the interest rates of a personal loan with a gold loan.

Interest rate on personal loan is 14.25-19 per cent, while on gold loan it is 12-24 per cent (depending on gold value).

Added fees on personal loan is 2-3 per cent of processing fees, while there is no processing fees on gold loans.

There is 2-3 per cent pre-payment charges on personal loans, while there is no pre-payment charges in gold loans.

Maximum loan limit is Rs. 50 lakh, while the maximum limit is Rs. 1 crore in gold loans.

Maximum tenure in personal loan is 7 years, while it is 1 year in gold loan.

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Opting for a gold loan instead of a personal loan is fast becoming a norm for both urban and rural India.

In fact the social stigma attached to gold loans has almost diminished and they are widely recognised as acceptable means of raising funds for meeting urgent money requirements.

Providing a collateral security in the form of gold, property and even shares/debentures help in decreasing the interest rates.

In case of a default, when the borrower fails to repay the loan on time the lender has an option of confiscating the security provided.

Otherwise a personal loan which is an unsecured loan attracts a high interest rate as the borrower doesn't provide any security to the lender.

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Contrary to a personal loan where the bank offers a fixed interest rate, gold loan rates are hugely dependant on the safety margin you leave for the lender.

That is, if you are pledging more jewellery for the same loan amount then interest rates will be conclusively lower.

Thus, depending on net weight and the purity of gold interest rates vary from 10 to 17 per cent.

Each bank has its own method to calculate the value of jewellery pledged.

Some banks fix the consideration price at a level (e.g. Rs. 1,000-1,200 per gram) for a period of 6 months and revise only after a year irrespective of the market value.

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While others take an average of two weeks' market value and then accordingly value of the jewellery amount is decided.

Some look at the daily movement of the gold price in international value and offer a loan.

The best thing about a gold loan and other secured loans is that irrespective of your credit history you can avail a loan by providing a security belonging to a third party which may include your parents, spouse, siblings and even friends.

Another advantage of a gold loan is that it is the easiest and the quickest option available.

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Without much paper work involved one can easily get a loan in a few minutes.

The only document required for a gold loan is personal identification proof. No other document is necessary.

Thus, in case of a medical emergency where instant cash is required, one can enjoy the benefit of a hassle free expeditious disbursement of loan.

More and more people are now opting for such loans whose tenure is not more than 1-2 years to finance their children's education, buying a car or even to pay down payment for a home purchase.

The repayment of the loan can be structured between the interest amount and the principal amount.

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Through this means the principal can be paid at the end of the loan period in a lump sum and the interest amount can be repaid in form of an EMI in regular intervals.

For example, if you took a gold loan for Rs. 2 lakhs for 2 years at 12 per cent, then monthly you would be required to pay Rs. 2,000 for 2 years.

But apart from paying this 2,000 every month you will have to pay back the lump sum principal value of Rs. 2 lakhs at the end of 2 years.

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Whereas the EMI for a personal loan of Rs. 2 lakhs for 2 years at 12 per cent interest rate would be Rs. 9,400 and there won't be any option for paying a lump sum money at the end of your tenure.

There are a few pointers to keep in mind before settling down on a specific bank or NBFC for a gold loan.

Check the interest rate being offered by the lender, it should be lower than a personal loan being provided by it.

Taking a loan from an NBFC is considered far costlier than a bank, some of them extending it to 33.6 per cent.

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So always check in a public sector or a private sector bank for gold loan at a reasonable rate.

In fact if you can restrict your loan amount to around 50 per cent of the market value of the jewellery then you will get reasonable interest rates.

As interest rates vary according to the quality of gold, rates would be lower on hallmarked jewellery.

Banks prefer jewellery instead of gold coins while providing loans as the customer has emotional value attached to the jewellery being pledged.