How can you take loan against Sovereign Gold Bonds?

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Whenever we discuss about investing in gold, the name that comes first is Sovereign Gold Bonds or SGB. Eight years ago, when the first series of SGB was launched, the price of 1 gram of gold was ₹2,684. Now it is at the level of ₹6,000. So, the bond has provided an annual return of 12 percent including interest. Due to its various benefits, SGB is proving to be an excellent option for investment.

However, many people are unaware that by investing in Sovereign Gold Bonds issued by the RBI, you can also take benefit of loans. The bond can be used as collateral to easily obtain a loan. Almost all banks and non-banking financial companies are providing loan against SGBs.

The rules and regulations for loans on SGB are quite similar to those for gold loans. Most financial institutions offer loans up to 70 percent of the bond’s value. The price of gold is calculated based on the average of 24-carat gold as disclosed by the Indian Bullion and Jewellers Association. Banks  offer loans on SGB to the tune of ₹20,000 to ₹25 lakh.

According to the SBI’s website, there are two types of loans on SGB: term loan and overdraft. In case of term loan, the loan amount is transferred to the bank account on the day of application. In overdraft, the loan amount can be used as requied. The interest is levied only on the amount used. Other banks too have similar rules.

Loans on SGBs fall under the secured loan category. So, it is cheaper than personal loans. SBI levies an annual interest of 10.55 percent on SGB loans, Union Bank charges 11.15 to 11.55 percent, and Indian Bank offers a rate of 9.05 to 9.90 percent. The interest rate of private sector Federal Bank is 12.50 percent. All institutions levy processing fees on SGB loans. SBI levies 0.5 percent of the loan amount or ₹500 as processing fees, whichever higher. Remember that there may be differences in the processing fees charged by different banks.

Now let’s understand what the process is for applying for this loan. The process of taking a loan on SGB is quite simple. Unlike education or personal loans, there is no need for excessive paperwork. There are no restrictions on the use of the loan amount; you can use it for any purpose, whether it’s for your child’s admission or medical treatment. Some banks, like SBI, are offer loans only on the bonds they have issued. The loan can be obtained from the same branch where the bond was purchased. While, you can get this loan with the Indian Bank on pledging of the  SGB or you can even pledge SGB holdings in your demat accounts. It is essential to have a bank savings account to apply for this loan.  You can easily get it agaisnt your demat account holdings or the physical certificate of your SGB.

Regarding the repayment of the loan, most banks, including SBI, are offering term loans for one year. While overdraft facilities are being provided for three years. If you opt for a term loan, you must repay the loan amount along with interest at the end of the  period. In the case of overdraft, the interest must be paid on a monthly basis. Upon full repayment of the loan, the papers related to your bond will be returned to you. The good news is that, most banks including SBI do not impose any penalty for prepayment or early repayment of the loan.

If you have invested in Sovereign Gold Bonds and suddenly need money, taking a loan against these bonds is a good option. There is a significant difference in the interest rates of banks and financial companies, so compare the  rates to save a considerable amount in interest payments.