Are gold loans safe?

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You may ignore the sparkle of the yellow

metal itself, but it is really difficult to
overlook the glitter of gold loans these
days.

In fact, spurred by soaring prices, rise in

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

Sample this: The organisedgold loan

market inIndia, pegged at 25,000 crore in
FY 2009, grew at a compounded annual
growth rate (CAGR) of around 38%
between FY 2002 and FY 2009 and is
expected to grow at an annual rate of 3540 % over the next three years to reach a
portfolio size of 50,000-53 ,000 crore by
FY11.

This study byICRA Management

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

Firstly, it is convenience. "The sheer

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

Lenders find it a timeless, good business

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

Secondly, it is low interest rates. In fact,

borrowing against gold is fast emerging as
the most preferred financing option as the
interest rate charged by institutions are
less compared to other retail loans such
as personal loans

For instance, the rate of interest on these

loans is between 10% and 24% per
annum. In comparison, personal loans
charge 16-26 % per annum, depending on
your credit profile.

Therefore, "it is better to take a loan

against gold than a personal loan as the
rates will be lower-since this type of loan is
secured.

Another good reason to take a loan

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

Besides, you can decide the approximate

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

Banks such asICICI BankandHDFC Bank

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

Also, instead of keeping gold idle in a

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

Moreover, lenders also prefer this route of

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

Added to these is the fact that pledging

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

Some people also go for it because they

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

This is, however, not to suggest that you

should throw all caution to the wind while
opting for a gold loan, as the chances of
losing your family heirlooms are higher in
case of a dispute or default.

That is because gold loans are secured

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

"Typically jewellery is an item of personal use

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

This goes without saying, therefore, "if you

need money quickly and don't have any
other assets to pledge, this is a useful
avenue.

But if you don't have the confidence of

returning the principal and interest in time,
then you should avoid taking a loan
against gold," advises Manglik.

Also, gold loans are good in a rising

market. However, if gold prices correct
drastically during the loan tenure, banks
may ask for the payment of the
difference.

Thus, even availing a gold loan is not

without risks, which explains why you
need to mull the pros and cons of pledging
the yellow metal carefully and also look for
some other options available before going
for a gold loan.

It also makes sense to consider in what

circumstances you should go for it and
when to avoid it.

In normal circumstances, for instance, if

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

However, "if you take a loan against gold

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

Also, a gold loan is not recommended for

people with low financial IQ because there
is a higher risk of default and your assets
may be auctioned off," suggests Ranu.

Normally, one does not plan to pledge

one's jewellery to take a loan. "Obviously,
if you possess the jewellery for a specific
purpose-to gift to your daughter, for
example-you are unlikely to sell it.

Economically, however, if the expected

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

It is, however, a strict no-no to borrow

against gold if you wish to use these funds
for instant gratification or speculative
investments. In that case it is advisable to
just look for some other options!

Dos and don'ts

Go for a gold loan only if you are looking

for emergency funds and don't have any
other option

Customers with bad credit history, low or

understated income can also go for it

Avoid a gold loan in case you are unable

to repay the loan or are likely to default on
repayment

Avoid it if gold prices are likely to correct

drastically during the loan tenure

Don't use the funds for instant gratification

or speculative investments

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