Page 118 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 6: Investment Strategies-I

Notes
Features
1. Secured Loan: Gold loan is essentially borrowings against the security i.e. gold.
Thus this loan should be taken only if you’re absolutely sure that you will be able to
repay the loan else you may end up losing your gold.

2. Tenure: Gold loans are typically for duration of 3 to 12 months. They are thus best
used to fund short term monetary requirements.
3. No end use restrictions: The loan can be taken for any purpose so long as the money
is not being used for speculative purposes.
4. Loan amount: In most cases, the maximum loan value is not more than 80% of the
value of gold. Most banks deal in relatively higher loan amounts. NBFCs on the
other hand, deal in small value loans.
5. Interest Rate: The interest rate charged by banks can be in the range of 11.5% and
15%. Banks usually charge a processing fee while NBFCs may not charge the same.
The rate of interest charged by NBFCs is much higher as compared to banks.

6. Repayment: The loan can be foreclosed at any time without any penalty. In case of
irregular payment of EMIs, a penal interest of up to 2% is charged by banks.
7. Market risk: The lender retains the exposure to the market risk arising from
movements in the market price of gold.
Advantages
1. Quick processing: Gold loans require minimum documentation and hence it can be
resorted to in times of urgent need. Banks maintain that it takes a few hours to get a
gold loan and some NBFCs state that it takes only a few minutes.

2. More attractive than a personal loan: The rate of interest charged on gold loans
tends to be much lower than that of a personal loan. Therefore, it may be worthwhile
putting you asset to work and thus reducing your cost of loan.
3. Emotional attachment will ensure timely payment: Most families have an emotional
attachment to gold and that will make you morally responsible to repay the loan in
time so that you can get back the gold that you had placed as a security.
4. Cash flow management: In a typical loan against gold transaction, only interest
needs to be paid during the tenure of the loan and the principal amount has to be
repaid at the end of the tenure. This allows customers the borrower to manage cash
flows better.
In times of need of money for a short duration, you can resort to gold loans. Let your asset
that you have built over years; be of use to you when you are undergoing a financial
strain. Note that you should take a gold loan if and only if you are sure of repaying the
loan in time. Else you may end up losing your most treasured asset.

Questions
1. How do you view Gold loan as sources of personal finance? Support your explanation
with relevant reasons.

2. Name the various banks providing the customers “Loans against Gold or Gold
Loans”. Which bank was the first to introduce this service in India?
3. Which finance option will you prefer: Gold Loan or Personal Loan? Give reasons.

Source: http://www.rupeetalk.com/

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