Gold Loans: Concept Behind Pledging

Posted in Finance Articles, Total Reads: 14334 , Published on 02 August 2011

Historically Indians have had a craze for yellow metal. We have read in history books that India was plundered time and again for it's vast riches. The craze for gold still continues and we see that the gold rates have zoomed up in recent times but inspite of that people continue buying gold. Gold unlike other metal is also an excellent investment option and can also help the families in the time of need. However all this while the only option in the time of need was to sell gold but now a new concept has mushroomed in the country of availing loans with gold as a collateral.

Gold Loans

Kerala, the God's own country has always been in the forefront of gold consumption. This is partly due to the thousands of Keralites staying in Gulf countries. They remit huge amounts back home which is then used to buy gold for investment purpose. So obviously the country's largest operator in gold loan business comes from this state only. Muthoot Group has been in the forefront in this business. The current mindset of the people in the country is that loaning gold should be viewed as a last resort. The company is trying to change the perception which they highlight even in their advertisements.

So how does loan against gold work ? It is actually very simple with very minimal paperwork. An individual can pledge gold ornaments, coins etc and the lender would provide immediate cash at a predetermined interest rate. The loans are sometimes disbursed in the form of demand draft and account transfer also. Some of the lenders disburse cash in a matter of five minutes and this is the reason why this form of loan is fast gaining popularity.

Some of the features which makes this type of loan attractive is that irrespective of the background of an individual the loan is disbursed as the lender can always back upon the gold which has been pledged. The interest rates charged is more attractive than the personal loan and also requires less paperwork. The gold pledged is back with the borrower once the loan is repaid and also most of the time there is no pre closure penalty. The valuation of the gold happens based on the purity and weight and the loan amount may vary from lender to lender. As mentioned before the interest rate is much attractive than the personal loan. However it is not fixed and depends upon the amount of gold pledged. Higher the gold pledged lesser is the interest.

So how does it look like from the lenders viewpoint. Though they are getting a collateral in the form of gold they are subjected to gold fluctuation risks. But even then lenders are of the view gold loan is one of the safest form of lending. The attractiveness can also be gauged from the fact that the top two business houses in this business have loaned an amount of around 25000 crore. The concept though in nascent stage has an excellent potential and as a result many banks have also ventured into this terrain.

However selling gold is still a touch subject in majority of the Indian households. Selling gold is never appreciated and in such cases loaning of gold is a better option which is available. This concept is attractive for people who are sure of the future cash flows but at present they are in urgent need of cash. With many Indians embracing this concept and mushrooming of lenders offering this service, it indeed augurs well for the industry as a whole. Whether it will accepted all across the country? Only time will tell.


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