Why is Gold Loan a Secured Loan?

02 Jul

A secured loan or secured debt is when the borrower has promised to give the moneylender certain belongings (assets), such as a car, gold jewellery or coins, if the borrower defaults on payments, i.e. fail to repay the money. The lender has the right to confiscate the belongings and sell them to recover the loss.

The property the borrower puts up as security is named as the ‘collateral’ on the loan.

If after selling off the collateral the amount does not cover the debt amount and interest amount, the lender may try to get a deficiency judgment against the borrower for the money needed to cover the loss that the lender couldn't recover.

Why is Gold Loan secured Loan?

1) A person seeking to get a Gold loan has to put up the Gold as collateral so that if the person is unable to pay back the amount, the Gold (ornaments or coins) can be sold to recover the loss thus making it a secured loan.

2) Moreover, since 100 per cent of the value of the Gold is not given off as a loan, even if the borrower defaults, the moneylender can recover the interest amount as well by selling the Gold.

3) Banks usually give 75 per cent of Gold's value as a loan whereas the Non-Banking Financial Corporations give up to 90 per cent of the value of the Gold as a loan.

4) But the banks offer loans at lower interest rates while the NBFCs charge higher interest rates. So it highly depends upon the amount you are willing to avail as a loan and the Gold you have or you are willing to pledge against your loan. There are a lot of secured loan products on the market such as HDFC Gold Loan, IIFL Gold Loans etc. which are offered at low-interest rates.

5) In the case of unsecured loans, like in the case of credit cards, the lending Organisation has no asset to sell so they can recover the loss if the borrower defaults.

6) The risk for the lender is lower in the case of secured loans thus secured loans have lower interest rates compared to unsecured loans. Although there are other factors also that determine how much interest the lender will charge, including the borrower’s employment stability, credit history, ability to repay etc. However, all of this is not checked in the case of Gold Loans.

Benefits of secured loans-

a) Low cost

Although you won't have to pledge collateral to get an unsecured loan, they come at a higher cost. Their interest rates are usually higher, their processing fees are generally high, they also most of the time charge for foreclosure. Pledging an asset gives assurance and a sense of relief to the lender that even if the default is made, they are not at any loss! As this reduces the risk considerably, the cost is lower in the case of secured loans.

b) A longer-term and larger amount

In a secured loan, the borrower is also a profit as they have the option for a longer repayment period, huge loan amount etc. The amount you will get against your gold depends upon your Gold's value. The higher the value, the greater the loan amount you could get against it.

c) CIBIL score not needed

Since security has been pledged, it lowers the dependency on the CIBIL score because the amount recovery can be done by selling the security. In the case of other loans, CIBIL score is a very important factor that determines whether you'll get the loan or not.

You can compare the different loan products based on repayment methods, tenures, cost using the Gold Loan calculator tool provided by different websites and choose the most appropriate one for you. It also depends upon the type of asset you hold. But before availing of any loan, whether secured or unsecured, never be in a rush and take your time to compare, calculate the pros and cons of each product offered by different banks or Non-Banking Finance Corporation and then make a conscious decision like an informed consumer.