Many lenders are witnessing a rising demand for gold loans amid the covid-19 pandemic. Those facing a cash crunch are borrowing heavily against gold.
Gold loans are the best option if you are looking for a short-term loan and have clarity that you will soon be able to repay it. While interest rates are important, there are other crucial things that you also need to keep in mind.
Lenders that offer low interest rates include Punjab & Sind Bank (7.00-7.50%), State Bank of India (7.50%) and Canara Bank (7.65%), according to data from Paisabazaar.com.
However, the interest rates can be as high as 29% with some lenders. For example, Bandhan Bank charges up to 18%, Muthoot Finance up to 27% and Manappuram Finance up to 29%.
If you are taking a ₹1 lakh loan at 7.5% for one year, the total interest that you will pay will come to ₹4,109. The equated monthly instalment will be ₹8,676.
For the same loan, if the interest rate is 18%, the EMI will be ₹9,168, and the total interest outgo will be ₹10,016. At a 29% interest rate, you will end up paying ₹14,053 in interest.
But before taking the loan, check the maximum tenure that the lender is willing to offer you. Punjab & Sind Bank, Canara Bank, Punjab National Bank, IIFL Finance and Manappuram Finance offer tenures for a year or less.
Some lenders like State Bank of India, Bandhan Bank and Muthoot Finance offer a maximum tenure of up to three years. Kotak Mahindra Bank can give a loan for up to four years.
Be wary of the processing fee, too. Some lenders charge a processing fee as a percentage of the loan amount. Punjab National Bank, for example, charges 0.75%, which will be ₹750 for a ₹1 lakh loan.
If you are unable to repay the loan on time, lenders could sell the gold to recover their money. If the gold prices fall, lenders could also ask you to pledge more gold.
Recently, many lenders issued notices to borrowers to pledge more gold due to a fall in prices, and said the gold could be auctioned if they fail to do so.
