India has always had a fascination for gold. Be it cultural, emotional or any other driving factor gold is found to be an integral part of the investments or savings of almost every Indian household. By far it can be said to have spread out to every community and region and thus brought rural and urban India in the same platform in at least one regard.
So far the gold loan market was dominated by non banking finance companies but gradually banks have also started entering the business thereby giving a clear indication of its viability as an effective loan product. But how good is a gold loan in comparison to personal loans poses a question for the borrower.
A personal loan is mostly an unsecured loan taken by the borrower for a variety of purposes like marriage, purchase of consumer durables, a family vacation amongst others. A gold loan on the other hand is a secured loan taken by keeping gold as collateral.
Since the yellow metal finds itself in most households, so the idea of mortgaging it to meet immediate fund requirements seems to be a lucrative option. But a personal loan scores over gold loan in certain aspects like interest rate, tenor and charges.
Though typically gold loans attract lesser interest than personal loans but interest rates on gold loans are dependant on loan to value (LTV) ratio. This means that greater the percentage of funding sought by the borrower against the value of gold, higher is the interest rate charged by the lender. This is because the lender associates a risk premium with the interest. Also lenders value gold at price lower than the market price so as to hedge themselves from any fluctuations in the value of the yellow metal.
The amount of loan disbursed depends on the credit worthiness of the borrower. A good credit history can fetch the borrower a personal loan at 14-15% interest. This is much cheaper than the rates offered for a gold loan. If the borrower has a home loan running then he can take a personal loan on the mortgaged property thereby making the interest rate even cheaper.