Why gold loan should be your last resort

Aparna Ramachandra, Founder Director, rectifycredit.com,says “the interest rates for an NBFC can start anywhere between 14-16% and go up to 26%. Banks definitely are way lower compared to this. Please remember that this rate of interest is not regulated by the RBI, the way home loan rates are regulated. So, the banks and the NBFCs are looking to make that extra layer in these loans and NBFCs can charge anywhere between 18% and 26% plus there is a processing fee and depending on the duration that you take this loan for. If you are looking at a very short tenure, maybe you do not end up paying as much, but if you say you are doing somewhere between six to nine months, correspondingly the charges are going to increase.”

All that glitters is not always gold and that is what we are seeing for all those NBFCs where there has been a strike down from RBI and another lot of NBFCs are also on radar. If you want to have a gold loan at such high prices also, what should you be doing? Should you shun NBFCs and go to banks which are also offering gold loans? But then you also need to have a prepayment strategy in mind. Let us analyse the situation of NBFCs who give gold loans. One strike down and inquiry coming up from the regulator is concerning.

Aparna Ramachandra: Yes, there is a concern, but then it cannot be a right or a wrong answer because there are good sound NBFCs and there are also banks who are giving gold loans. Now, vis-a-vis banks, NBFCs are more agile when it comes to gold loans. The document requirement for example or the turnaround time are convenient for the end user. The accessibility, the ability to get loans with less documents, especially when we all know that a gold loan is something that a person is looking at for a short term and in an emergency.


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So, to that extent, the NBFCs have always stepped in with a much lower turnaround time. But somewhere along the line, a lot of compliances were compromised and that is a separate story but for the end user, I would not say do not go to an NBFC at all. But if you choose to go to an NBFC, please remember that while your turnaround time is faster, the ability to get the loan is easier, you will end up paying maybe a higher rate of interest compared to a bank, number one.

Number two, there may also be some other hidden, extra charges vis-a-vis a bank. If you do a cost benefit analysis, this is what you will figure out. So, if you are in a dire need and need the money as of yesterday and are willing to pay whatever the interest rate is because you know this is just for a short term and you are confident that you will be able to repay, then NBFC is your answer. If not, then the bank is the answer.

Why is there difference in terms of interest rate and all other charges that you just mentioned as compared to a bank?

Aparna Ramachandra: The interest rates for an NBFC can start anywhere between 14-16% and go up to 26%. So, banks definitely are way lower compared to this. Now, please remember that this rate of interest is not regulated by the RBI, the way home loan rates are regulated. So, the banks and the NBFCs are looking to make that extra layer in these loans and NBFCs can charge anywhere between 18% and 26% plus there is a processing fee and depending on the duration that you take this loan for.

So, if you are looking at a very short tenure, maybe you do not end up paying as much, but if you say you are doing somewhere between six to nine months, correspondingly the charges are going to increase.

In this scenario, if someone really wants to explore going to an NBFC, although it is always good to go for a lower interest rate, how do you also analyse what kind of NBFC you might want to consider?

Aparna Ramachandra: I would suggest an NBFC that has a good track record for the last 10 to 15 years. Also, check online what kind of complaints or grievance redressal system is in place. What has happened in case of a default,. These are scenarios one needs to check before one goes and signs up for an NBFC.

Having said that, I would also be extra cautious about these neo so-called digi lenders or those online ones where they say gold loan is available in 30 seconds and at your doorstep and stuff like that because those are very dicey. A) the rates of interest is higher. B) tomorrow in case you default, then you do not know what happens over the auction and the whole process for you to recover your gold and all of that. So, it is better to go to an established NBFC where you know the systems, where you know the procedures and you are somewhere able to go and reach out to somebody in case something were to go wrong.

For me, at rectifycredit, my first big concern is always that in case something were to go wrong, is there somebody that is reachable? When everything is good, all is well, then there is no issue. You sit at home, do it online, you repay, you close and you move forward. But just in case something were to happen, then if you do not have anywhere to go back to, then you are caught in a piquant situation, especially in our country where customer rights, grievance all take a backseat and which is why these are primary things one needs to look out before you sign up with an NBFC.

Let us also talk about the other aspect of this entire topic is when should one actually go for a gold loan?

Aparna Ramachandra: In an ideal case scenario, that should be your last option because you try all your other sources and then go for a gold loan . because in case something were to happen and you are not able to repay, then that whatever family gold, your gold, whatever gold, that gold is gone. Then, to get back that gold is almost next to impossible. It gets auctioned and that is the end of the story, so that is number one. So, if you are not sure about your repayment, then do not go pledge the gold, number one. I am first talking about when not to go for a gold loan.

Second, if you know that you will not be able to sustain these kinds of rates of interest for the tenure that you have agreed, then do not go for a gold loan because you are going to lose the gold.

Thirdly, if it is something that belongs only to you, then you have to have that complete right over that gold. If not, do not go pledge that against the gold loan. Now, where you can go and choose to borrow this money against this gold is A) in a scenario where you know that the amount that you are going to get is going to be much higher, so that is one option. These days almost 75% is the LTV, loan to value. B) Where you are very clear why you are taking this loan and you are also confident that you are going to repay this loan. C)Compared to say, for example, a credit card debt, where we know we are going to end up paying something like 48% rate of interest. If you go to an NBFC, you are paying anywhere between 24 to 26%. So the trade-off. These are the pros and cons. The borrower needs to do the homework first before going and signing up to the first available NBFC.

But then I also want to understand because you said this has to be your last and last resort. The last resort can also be having a loan taken up from your investments other than gold. So, even after that, you should be considering gold or that can come before that?

Aparna Ramachandra: This is a personal scenario as to how desperate the situation is. But in an ideal case scenario, if you are able to exhaust your investments, you can borrow against your investment, those are things that you need to be first exhausting before you sign up for these loans because please understand the cost of borrowing is very high, number one.

Number two, in case you end up defaulting, then you are going to lose out on that gold, that is the only thing. So, if you are clear of these two, then only a gold loan is a good idea. Then you do not have to take out a loan against your investments. But you are taking a gold loan for a short term, you repay this and you move forward, all is well. But if you are not sure about that, then gold loan, I would say should be the last of your priority.

Also talking about the repayment strategy. But before that I want to understand because we also invest, it is not only the physical part of the gold that people have, a lot of people invest through gold ETF and gold fund also and sovereign gold bonds. But money cannot be borrowed with those investments.

Aparna Ramachandra: No. It is always the physical gold.

How should you analyse the repayment strategy for a gold loan repayment and also missing out your payments impact your credit score?

Aparna Ramachandra: Missing out your payments for sure directly impacts your credit score. But the bigger loss in this gold loan is if you continuously miss out say for three months, your account becomes an NPA, then the gold loan lending company almost has a right to go and auction your loan. At times, we have had cases where the customer has not even been informed that his gold is getting auctioned. So, a whole lot of things happen there.

It is very important that you decide when you will be able to repay the money and get the gold back. If you know that this is a short term – three months or six months – you take a call as to when you want to service this interest, till when you need this money and when you will be able to repay. According to that, take the gold loan, do not sign up just because something is available. If you know that this is a short-term emergency and you are going to be able to tide over, then stick to a shorter tenure, repay, move on in life.

How is the gold assessed? How do they decide what amount of loan you will be getting from your gold?

Aparna Ramachandra: Till 2020, the LTV was 60%, which means if your gold was valued at Rs 1000, you were eligible for a loan up to Rs 600, which was 60% LTV. But now RBI has allowed that to go up to 75%. So, if your gold is valued at Rs 1,000, you are eligible for a loan up to Rs 750. So that is how the gold is evaluated. When they evaluate, they always give you a certificate, they give you details about what gold you have given, what quality, what is it that they have valued at and how much you have borrowed. That document is always given to you when you take the loan, when you sign up for the loan.

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