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Imagine every gold loans are inexpensive
December 18, 2010 by hardeep7467 · Leave a Comment
Recently, one of my office colleagues took up the offer of a free financial plan, which we offered to our own staff members.
After the data gathering exercise was over, we realised that she had taken a gold loan from a neighbourhood co-operative bank to fund the down payment requirement on a house she had recently bought.
What was surprising was that she was paying an effective interest rate of 41% pa on this fully secured loan. To add insult to the injury, that co-operative bank had also taken a lien on her life insurance policy, which had a surrender value that was about 25% of the loan value.
She had sought our assistance while taking the home loan, but had not mentioned any problems with raising the down payment.
When we asked her why she decided to take the gold loan from that particular lender, her answer was illuminating (and I hope somebody from the burgeoning gold loan industry is also reading this).
Firstly, she knew somebody in the bank who promised her a loan fairly quick (it actually took 12 days, but it was the promise from somebody she knew that drew her in in the first place).
Secondly, since the repayment was in EMIs, she did not understand the fact that the actual interest rate was as high as 41% pa.
Thirdly, she did not mind providing the additional security of her life insurance policy since it was anyway lying around in her cupboard. And perhaps the clincher was the inherent assurance that she could get back her precious jewellery as soon as she repaid the entire loan.
Now, most financial planners recommend taking gold loans (of course, only when taking a loan is absolutely essential) as they are economically priced, available quickly irrespective of your credit history or age or income, and can be prepaid as and when you have additional funds without (normally) attracting any pre-payment premium.
My colleague’s case outlined above made me rethink this. Sure, gold loans can be economical and convenient. But in the hands of formal sector loan sharks (like the one my colleague encountered), even these loans can be exorbitantly priced.
So how do you ensure that you get an appropriately priced gold loan when you need one?
Firstly, do not take any offer from any bank or non-banking finance company that provides only EMI but does not confirm the interest rate in writing.
Secondly, remember the lower the loan amount, lower will be your interest rate, which in the same lender can vary from 12% to 24%.
Here is an example that will illustrate this point. Suppose you
have jewellery with a sale value of Rs1 lakh and are looking for a loan of around Rs50,000.
So essentially, you are looking at a loan of 50% of the value of your jewellery. This should come fairly cheap at around 12% pa, whether you take it from an NBFC (companies like Manappuram, Muthoot, etc) or private banks (HDFC Bank, ICICI Bank, etc) or a PSU bank.
Now the lenders would perhaps be willing to lend you as much as Rs80,000 against the same jewellery but it would come at a stiff cost of around 18-24%.
So if you need a higher loan amount, it might be cheaper to provide additional jewellery as security rather than pay a higher rate by taking a higher amount of loan against the same jewellery.
There are various lenders in the market who offer good interest rates for gold loans.
