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Why are Gold Loans Good for New and Self-Employed Borrowers?

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Investing in gold has been a standard practice for centuries. Culturally, it has been a very auspicious metal to have in households. Moreover, time and time again, it has also been an asset class that comes to our rescue during a sudden financial emergency.

For the majority of households, gold has been the primary source of funds when it comes to huge financial expenses. Subsequently, both formal financial institutions and informal financial institutions like Non-Banking Financial Companies (NBFCs) have banked on this trend by offering gold loans.

What is a gold loan?

A gold loan is where you submit your gold ornaments or gold bars to a lender in exchange for funds. It is a secured loan as your gold acts as collateral, and you need to repay the borrowed amount to get your gold back. Gold loan is also a versatile loan as it comes with flexible repayment options. Unlike other secured loans like car loan and home loan, there is no restriction on how you need to use the funds. You can use the funds for funding your child’s education, wedding or even for your vacation planning. All it needs is that you just need to walk into a bank or NBFC branch with your gold and get a gold loan for your requirements.

How does the gold loan work?

Like most secured loans, you need to submit your gold along with your essential Know Your Customer(KYC) documentation to the lender. Then the lender will value your gold and also verify the submitted documents. As per their policy, the lender will disburse the loan amount to your account. Then, as per the terms and conditions of the loan agreement, you need to pay the loan amount along with the levied interest and take back the pledged gold from the lender.

It comes with flexible repayment options where you can repay the loan in different ways:

  • You can pay only the interest and the principal later at the time of closing the loan
  • There are no prepayment charges unlike other loans
  • You can also make part payments.

Also, gold loans don’t come with any stringent criteria like a good credit score, income proof, and so on. The premise is that anyone who has gold can get a loan from a bank or an NBFC. So, even in case of a low credit score, you can avail a gold loan.

Moreover, a gold loan comes with a lot of benefits for new and self-employed individuals such as:

1. Build your credit score:

As the gold loan is a secured loan, many lenders do not consider the individual’s credit score as you give your gold as collateral. Furthermore, if you are 18 years and above, with valid ID and address proof, then you can go for a gold loan.

In case, you are an individual who has no or very low credit score, and then you can use the gold loan to build up your credit score. By repaying the loan’s  Equated Monthly Instalments (EMIs) on time, then you can build up a favourable credit score. It will also aid you when you apply for credit cards, home loan, car loan, and so on.

2. Ease of availing funds:

One of the best advantages of a gold loan is that you can get funds immediately. Most Non-banking Financial Companies (NBFCs) offer loan against gold for amount as low as Rs.1,500. Especially if you are an individual who does not have a regular income or is a homemaker, you can opt for a gold loan. As conventional loans require substantial proof of income, it will be difficult for both new and self-employed borrowers to avail a loan.

3. Bridge your cashflow:

Having an adequate cashflow at the middle or end of the month is often an obstacle faced by a majority of both self-employed or salaried individuals. At this time, a gold loan can come to their financial rescue. By providing the lender with your gold as collateral, you can quickly take a loan to handle your expenses.

As it involves a very basic documentation process, gold loan is a boon for your cashflow troubles. If you are a farmer or working in the agricultural sector, you can get a gold loan at a lower interest rate than the standard interest rates. Some NBFCs also offer a gold loan for women at discounted interest rates.

4. The increased gold value will be your advantage:

Over the years, the value of gold is on the rise, and yet it has still maintained its popularity. There has been an increase of over 20% over the past year alone.  In such a situation, you will get a higher loan amount for the gold pledged by you. Also, the interest rates for the loan will be less as the risks associated with the deflation of gold price will be lower.

5. Access to standardized lending platforms:

With regularisation and standardization of lending platforms, both NBFCs and banks, availing a gold loan is now a transparent process. Individuals no longer need to rely on any middlemen or loan sharks for pledging their gold. The organised sector of banks and NBFCs today offer loans with a higher loan to value ratio along with flexible repayment tenure and competitive interest rates.

6. Easier access to funding options:

Thanks to the advent of digital banking, nowadays you can also go for a gold loan online. As soon as you deposit the gold with the lender’s branch, the amount will be transferred to your account. This process happens through an online registration link that connects the lender and your bank account.

You can check the loan amount, interest and EMI amount online without the need to visit the branch physically. Moreover, lenders nowadays also give the ease of mobile applications where you can check the loan status anytime and anywhere.

The above factors are a testament to the fact that the facets of gold loan are rapidly changing. It is becoming a viable tool for individuals who have no or less credit score to strengthen their credit profile.

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