Getting your gold’s worth of loan is tough

There is nothing wrong in taking a loan by mortgaging gold jewellery, or so a number of ads are trying to tell Indian women these days.

“Jab ghar girvi rakh sakte ho, toh gehne kyon nahi (When you can mortgage your home, why not jewellery)?” goes one.

“Ek locker se doosre locker mey hi toh jaa rahe hai (the jewellery is just moving out of one locker into another)” says another.

The obvious target is the Indian mindset, which is averse to selling or mortgaging the gold jewellery of one’s mother or wife to get money for financing his needs. Note how in almost all the ads, it is the lady of the house who is saying she doesn’t have a problem with mortgaging her gold.

Just in case you are one of those the ads have prompted into taking a loan against family gold jewellery, here are a few things to keep in mind.

First, there are various types of financial services companies that offer loans against gold and the interest rates charged by them vary widely.

These include banks such as HDFC Bank, ICICI Bank, State Bank of India and its associates, Allahabad Bank, Development Credit Bank, etc. Then there are a host of cooperative banks that also offer these loans. There are also non-banking financial companies (NBFCs), which cannot take deposits of money from the public but can give loans. Major players in this category include south-based players such as Manappuram Finance and Muthoot Group.

The interest rates charged on loans against gold are lower than those charged for personal loans. For example, a leading private sector bank charges as much as 18% interest on personal loans, but gives loans against gold at 15.75% or less. Another bank charges 14.5-16.5% for personal loans and 12.5% for loans against gold jewellery.

Loans from NBFCs are typically costlier than those from banks. Muthoot, for example, gives loans at a fixed rate 33.6%.
Do note the huge difference in the rates charged.

Secondly, the interest rate applicable varies depending on the quality of gold jewellery. If you have hallmarked jewellery, with a ‘BIS’ stamping by a hallmarked jeweller to indicate the purity of the gold used, the interest rate charged will be lower than on non-hallmarked jewellery. The difference could also be on the basis of carats of gold, whether 22 or 18, etc.

Remember, jewellery cannot be made of pure gold. Pure gold is available only in the form of gold coins and bars, which are not accepted by most banks and financers. The reason? People have an attachment to their jewellery rather than to gold coins or bars.

As the head of a leading NBFC told DNA, “If the value of gold falls below the loan amount, the borrower will never come back to free his gold. But if he has mortgaged his grandmother’s necklace, whether the price goes up or down, he will come back for it.”

Thirdly, the amount of loan you can get, even if the jewellery is hallmarked and of high quality, the loan amount would be much less than the jewellery is worth.

Also, the current price of gold — around Rs 16,785 for 10 grams — is not taken into account by all the banks, leave alone NBFCs.

Every bank would have its own method of calculating the value of the jewellery you offer to mortgage. Some banks fix the consideration price at a level (say Rs 1,005-1,215 per gram) for about 6-12 months and revise it only a year later, no matter what the actual market price of gold in the international markets is.

A few others are more reasonable and take an average of two weeks’ market price and value the jewellery to that extent. Yet others look at the day’s international trading price and offer a loan considering the value of gold on that price.

Bankers owe this to the vagaries of the price of gold. They keep an extra cushion as there are purity issues and also because some jewellery valuers have cheated them on purity in recent times.

The way a bank calculates the price of gold can make a huge difference in the amount of loan you are eligible for — it could be as much as 5-10% of the loan amount.

The amount of loan can also differ based on the period for which the loan is needed and the frequency of repayment.

So, before you zero in on any of the financers for a loan against gold, do enquire around. See how much a bank or NBFC is offering per gram, and whether it is after deducting the processing fees, etc. Also check if you are getting the amount you need.

Finally, only select branches of banks offer loans against gold jewellery. Small branches, which do not have huge storage space, wouldn’t be offering loan against gold. Do run a check nearer home before getting down to the nitty-gritty.