Gold loans: All you need to know about EMI option and overdraft facility

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Generations have believed that investing in gold is worthwhile in every country since it means safety for the future. In any financial emergency, gold can get you a loan and help overcome the situation.

During the pandemic loans raised by households by pledging gold rose by 82% in FY21 compared to the previous year. It is still rising, say bank officials.

Gold loan is a secured loan and, therefore, interest rates are lower than the rates for personal loan making it a much-preferred avenue.

Options

There are two gold loan options that most banks are offering — gold loans with regular EMIs and gold loan with overdraft facility.

Therefore, before taking this loan you should know the difference between these two.

With EMI

A gold loan with an EMI option is most common. In this case, to pledge your gold, you can visit the branch of your nearest bank or non-banking finance company. According to regulations they would credit an amount in in your bank account with a regular EMI option for a reimbursement period.

According to latest RBI guidelines, you can get a maximum 90% loan amount of your value of the gold pledged.

Interest rates

Among banks, Punjab and Sind Bank offers the lowest interest rate of 7.00% on a Rs 5 lakh gold loan, with a reimbursement period of three years.

Bank of India (BOI) and Canara Bank are jointly offering the second cheapest interest rate on gold loans which is 7.35% per annum.

State Bank of India is currently offering gold loans at an interest rate of 7.5% per annum.

NBFC charge comparatively higher interest rates between 9.24% to 12% per annum.

Overdraft

Gold loan with overdraft facility works like a credit card. When you pledge your gold to the lender, they open an overdraft account with a loan limit.

You are free to spend as and when you want to. The gold loan interest rate will be applicable only on the amount you use.

All leading banks offer gold loans with an overdraft facility to its customers.

In a gold loan with a regular EMI option, interest is charged on the entire loan amount even if you do not spend the sum immediately. But in the case of an overdraft facility, interest charges will be applicable only on the amount used.

So, in general a gold loan with an overdraft facility may prove to be beneficial.

But the interest rates on overdraft facility is a bit more – at least by 50 basis points compared to the EMI loans.

Pay only interest

Some banks like ICICI Bank and NBFCs like Muthut Finance and Manappuram Finance offer another mode of repayment.

“The customer can repay the interest component only at the end of the year and renew the loan for another year. He/she does not have to pay EMIs even,” said a bank official.