Are gold loans safe?Are gold loans safe? www.muthootfincorp.comwww.muthootfincorp.com

You may ignore the sparkle of the yellow You may ignore the sparkle of the yellow metal itself, but it is really difficult to metal itself, but it is really difficult to overlook the glitter of gold loans these overlook the glitter of gold loans these days. days.

In fact, spurred by soaring prices, rise in In fact, spurred by soaring prices, rise in consumerism and, more importantly , consumerism and, more importantly , changing social norms, gold loans have changing social norms, gold loans have not only seen an unprecedented rise in not only seen an unprecedented rise in recent times, but are also all set to shine recent times, but are also all set to shine more brightly in future. more brightly in future. 

Sample this: The organisedgold loan Sample this: The organisedgold loan market inIndia, pegged at 25,000 crore in market inIndia, pegged at 25,000 crore in FY 2009, grew at a compounded annual FY 2009, grew at a compounded annual growth rate (CAGR) of around 38% growth rate (CAGR) of around 38% between FY 2002 and FY 2009 and is between FY 2002 and FY 2009 and is expected to grow at an annual rate of 35-expected to grow at an annual rate of 35-40 % over the next three years to reach a 40 % over the next three years to reach a portfolio size of 50,000-53 ,000 crore by portfolio size of 50,000-53 ,000 crore by FY11. FY11.

This study byICRA Management This study byICRA Management Consulting Services alone is enough to set Consulting Services alone is enough to set the alarm bells ringing for those in the the alarm bells ringing for those in the pawn broking business. The reasons for pawn broking business. The reasons for this kind of growth in gold loans, however, this kind of growth in gold loans, however, are not far to seek.  are not far to seek. 

Firstly, it is convenience. "The sheer Firstly, it is convenience. "The sheer convenience of a loan proposition against convenience of a loan proposition against such a liquid asset suits both the lender such a liquid asset suits both the lender and the borrower. In some cases, it may and the borrower. In some cases, it may be the last resort for the client, but it is a be the last resort for the client, but it is a convenient one.  convenient one. 

Lenders find it a timeless, good business Lenders find it a timeless, good business model, while clients, who need money model, while clients, who need money quickly, find this the best way to raise quickly, find this the best way to raise funds," says Jayant Manglik, president funds," says Jayant Manglik, president ofReligare Commodities.  ofReligare Commodities. 

Secondly, it is low interest rates. In fact, Secondly, it is low interest rates. In fact, borrowing against gold is fast emerging as borrowing against gold is fast emerging as the most preferred financing option as the the most preferred financing option as the interest rate charged by institutions are interest rate charged by institutions are less compared to other retail loans such less compared to other retail loans such as personal loans as personal loans

  For instance, the rate of interest on these For instance, the rate of interest on these loans is between 10% and 24% per loans is between 10% and 24% per annum. In comparison, personal loans annum. In comparison, personal loans charge 16-26 % per annum, depending on charge 16-26 % per annum, depending on your credit profile.  your credit profile. 

Therefore, "it is better to take a loan Therefore, "it is better to take a loan against gold than a personal loan as the against gold than a personal loan as the rates will be lower-since this type of loan is rates will be lower-since this type of loan is secured.  secured. 

Another good reason to take a loan Another good reason to take a loan against gold is that most banks/NBFCs against gold is that most banks/NBFCs allow you to pay only the interest on the allow you to pay only the interest on the loan monthly and the principal payment at loan monthly and the principal payment at the end of the term and not as an EMI; the end of the term and not as an EMI; which works better from an interest which works better from an interest perspective," says Lovaii Navlakhi, perspective," says Lovaii Navlakhi, managing director & chief financial planner managing director & chief financial planner , International Money Matters.  , International Money Matters. 

Besides, you can decide the approximate Besides, you can decide the approximate loan amount based upon your gold value, loan amount based upon your gold value, i.e. no income proof is required unlike in a i.e. no income proof is required unlike in a personal loan where the loan amount is personal loan where the loan amount is decided based on your income proofs decided based on your income proofs provided. The processing of the loan is provided. The processing of the loan is also much faster because of easy also much faster because of easy documentation. documentation.

Banks such asBanks such asICICIICICI BankBankandandHDFCHDFC Bank Bank may ask for your ID and other personal  may ask for your ID and other personal details which can take up to an hour while details which can take up to an hour while non-banking finance companies such as non-banking finance companies such as Muthoot Finance or Manappuram Finance Muthoot Finance or Manappuram Finance claim to process the loan in a few claim to process the loan in a few minutes.  minutes. 

Also, instead of keeping gold idle in a Also, instead of keeping gold idle in a locker at home or in a bank's locker, "it is a locker at home or in a bank's locker, "it is a good idea to borrow against it at lower good idea to borrow against it at lower rates in comparison to other retail loans. rates in comparison to other retail loans.

Moreover, lenders also prefer this route of Moreover, lenders also prefer this route of financing as the default rate is negligible. financing as the default rate is negligible. In general, the loans may be provided for In general, the loans may be provided for 70-85 % of the value of gold," says Amar 70-85 % of the value of gold," says Amar Ranu, senior manager,Motilal Oswal Ranu, senior manager,Motilal Oswal Securities. Securities. 

Added to these is the fact that pledging Added to these is the fact that pledging gold is no longer considered a taboo and gold is no longer considered a taboo and disgraceful in Indian society. This explains disgraceful in Indian society. This explains why gold loans are now widely recognised why gold loans are now widely recognised as acceptable means of raising funds for as acceptable means of raising funds for meeting urgent requirements by all meeting urgent requirements by all segments of society. segments of society.

Some people also go for it because they Some people also go for it because they find it more private than going to a find it more private than going to a neighbourhood moneylender . Also, with neighbourhood moneylender . Also, with gold prices soaring, even banks have gold prices soaring, even banks have begun to push customers toward gold begun to push customers toward gold loans. The transactions have become loans. The transactions have become more popular as small personal lending more popular as small personal lending dries up because of rising defaults on risky dries up because of rising defaults on risky loans.  loans. 

This is, however, not to suggest that you This is, however, not to suggest that you should throw all caution to the wind while should throw all caution to the wind while opting for a gold loan, as the chances of opting for a gold loan, as the chances of losing your family heirlooms are higher in losing your family heirlooms are higher in case of a dispute or default. case of a dispute or default.

That is because gold loans are secured That is because gold loans are secured loans. So if you fail to repay the loan within loans. So if you fail to repay the loan within the stipulated loan period, a higher interest the stipulated loan period, a higher interest will be charged and the gold may even be will be charged and the gold may even be auctioned off. auctioned off. 

"Typically jewellery is an item of personal use "Typically jewellery is an item of personal use and its emotional value is sometime far higher and its emotional value is sometime far higher than its market value. If for any reason you are than its market value. If for any reason you are unable to pay pack the loan, the lender can sell unable to pay pack the loan, the lender can sell your jewellery in the market to recover its dues your jewellery in the market to recover its dues after which you can never get your jewellery after which you can never get your jewellery back," says Harsh Roongta, CEO, back," says Harsh Roongta, CEO, Apnapaisa .com, a price & features comparison Apnapaisa .com, a price & features comparison engine for loans, insurance and investments.  engine for loans, insurance and investments. 

This goes without saying, therefore, "if you This goes without saying, therefore, "if you need money quickly and don't have any need money quickly and don't have any other assets to pledge, this is a useful other assets to pledge, this is a useful avenue.  avenue. 

  But if you don't have the confidence of But if you don't have the confidence of returning the principal and interest in time, returning the principal and interest in time, then you should avoid taking a loan then you should avoid taking a loan against gold," advises Manglik.  against gold," advises Manglik. 

Also, gold loans are good in a rising Also, gold loans are good in a rising market. However, if gold prices correct market. However, if gold prices correct drastically during the loan tenure, banks drastically during the loan tenure, banks may ask for the payment of the difference.  may ask for the payment of the difference. 

Thus, even availing a gold loan is not Thus, even availing a gold loan is not without risks, which explains why you without risks, which explains why you need to mull the pros and cons of pledging need to mull the pros and cons of pledging the yellow metal carefully and also look for the yellow metal carefully and also look for some other options available before going some other options available before going for a gold loan. for a gold loan.

It also makes sense to consider in what It also makes sense to consider in what circumstances you should go for it and circumstances you should go for it and when to avoid it.  when to avoid it. 

In normal circumstances, for instance, if In normal circumstances, for instance, if your credit history is bad or completely your credit history is bad or completely beyond repairable in near future, you can beyond repairable in near future, you can think of availing a loan against gold, that think of availing a loan against gold, that too at a discounted rate in comparison to too at a discounted rate in comparison to personal loans. Customers with low or personal loans. Customers with low or understated income can also avail a loan understated income can also avail a loan against gold.  against gold. 

However, "if you take a loan against gold However, "if you take a loan against gold for personal expenses such as a 3D TV, for personal expenses such as a 3D TV, car or foreign trips, then it is quite possible car or foreign trips, then it is quite possible that you may default on the loan that you may default on the loan

Also, a gold loan is not recommended for Also, a gold loan is not recommended for people with low financial IQ because there people with low financial IQ because there is a higher risk of default and your assets is a higher risk of default and your assets may be auctioned off," suggests Ranu.  may be auctioned off," suggests Ranu. 

Normally, one does not plan to pledge Normally, one does not plan to pledge one's jewellery to take a loan. "Obviously, one's jewellery to take a loan. "Obviously, if you possess the jewellery for a specific if you possess the jewellery for a specific purpose-to gift to your daughter, for purpose-to gift to your daughter, for example-you are unlikely to sell it. example-you are unlikely to sell it.

Economically, however, if the expected Economically, however, if the expected appreciation in value is greater than the appreciation in value is greater than the cost of the loan, it is better to take a loan. cost of the loan, it is better to take a loan. But the period for which you propose to But the period for which you propose to borrow should be short term or temporary, borrow should be short term or temporary, and you should have a high probability of and you should have a high probability of being able to repay the loan on time," being able to repay the loan on time," advises Navlakhi.  advises Navlakhi. 

It is, however, a strict no-no to borrow It is, however, a strict no-no to borrow against gold if you wish to use these funds against gold if you wish to use these funds for instant gratification or speculative for instant gratification or speculative investments. In that case it is advisable to investments. In that case it is advisable to just look for some other options!  just look for some other options! 

Dos and don'ts  Dos and don'ts 

Go for a gold loan only if you are looking Go for a gold loan only if you are looking for emergency funds and don't have any for emergency funds and don't have any other option  other option 

Customers with bad credit history, low or Customers with bad credit history, low or understated income can also go for it  understated income can also go for it 

Avoid a gold loan in case you are unable Avoid a gold loan in case you are unable to repay the loan or are likely to default on to repay the loan or are likely to default on repayment  repayment 

Avoid it if gold prices are likely to correct Avoid it if gold prices are likely to correct drastically during the loan tenure  drastically during the loan tenure 

Don't use the funds for instant gratification Don't use the funds for instant gratification or speculative investments or speculative investments

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