Financial needs can arise unexpectedly, and leveraging existing assets as collateral for loans can be a smart way to secure funds. While many consider unsecured personal loans, secured loans offer a more cost-effective alternative. But with multiple assets that can be pledged, where should one start?
Gold and property have traditionally been well-known sources of secured credit. With gold prices surpassing ₹90,000 per 10 grams, marking a historic high not seen since the global peak in 1980, loan against gold ornaments have become an increasingly attractive option. However, prices fluctuate, and it's essential to consider other alternatives before making a decision.
One such option is securing a loan against a life insurance policy, which many families may find beneficial. But which one suits your financial needs best? Let’s break down their key differences to help you make an informed decision.
Understanding Loan Against Gold
A loan against gold allows you to borrow money by pledging your gold as collateral. This option is popular due to its quick processing, minimal documentation, and easy accessibility. However, note that the loan can only be taken against the pure gold weight, and no value is put on design, workmanship, stones, etc.
Key Features of Loan Against Gold
- Loan Amount: Typically 75% of the gold’s market value.
- Interest Rate: Ranges from 7% to 15% per annum, depending on the lender.
- Tenure: Short-term, usually 6 months to 3 years.
- Processing Time: Fast disbursal, often within a few hours.
- Repayment Flexibility: Can be repaid in EMIs or as a lump sum.
- Risk: If not repaid, the lender can sell the pledged gold to recover the loan amount.
Where to Get a Loan Against Gold
Note that gold loans cannot be availed of digitally; as it requires a branch or home visit to collect the gold as collateral. Several banks and non-banking financial companies (NBFCs) offer loan against gold in India with competitive interest rates. Some of the leading providers include: State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Muthoot Finance, Manappuram Finance, IIFL Finance, Bajaj Finserv, HDB Financial Services, Rupeek and India Gold.
Some lenders offer doorstep gold loan services, making the process even more convenient for borrowers.
Gold Loans from Informal Lenders: Quick but Risky
While banks and NBFCs are well-known sources of gold loans, many people turn to informal lenders, such as jewelers, pawn shops, and local moneylenders, for quick cash. These lenders offer fast approvals with minimal paperwork, making them an attractive option for those in urgent need of funds.
However, informal gold loans come with significant risks and hidden costs that borrowers should be aware of before pledging their gold.
Why Do People Opt for Informal Gold Loans?
- Quick access to cash – Unlike banks that require formal applications, informal lenders provide loans almost instantly.
- Minimal documentation – No credit checks or income proof needed.
- Flexibility – Borrowers can request access to the gold for specific functions during the loan term for an additional fee.
The Risks of Informal Gold Loans
While these loans may seem convenient, they can be far more expensive and risky than loans from regulated institutions.
1. Higher Interest Rates & Hidden Charges
Most informal lenders charge significantly higher interest rates compared to banks and NBFCs. Some also add hidden charges, making repayment more expensive in the long run.
2. Risk of Fraud & Loss of Gold
Since these lenders operate without strict regulations, there’s a higher risk of fraud. Some borrowers have faced situations where:
- Their gold was undervalued, leading to a lower loan amount.
- The lender changed repayment terms unexpectedly, making it difficult to reclaim their gold.
- In extreme cases, borrowers lost their gold entirely due to fraudulent practices.
3. Limited Legal Protection
Unlike RBI regulated banks and NBFCs, informal lenders are not required to follow standard lending norms. If a dispute arises, borrowers have very little recourse, making it difficult to recover their pledged gold or challenge unfair charges.
Understanding Loans Against Life Insurance Policy
A loan against life insurance policy allows you to borrow money using your policy’s surrender value as collateral. Only certain policies, such as endowment plans and ULIPs, are eligible for this type of loan.
Key Features of Loan Against Life Insurance Policy
- Loan Amount: Typically 60-90% of the surrender value of the policy.
- Interest Rate: Lower than personal loans, ranging from 8% to 16% per annum.
- Tenure: Can extend up to the remaining policy term.
- Processing Time: Takes a few days due to policy verification.
- Repayment Flexibility: Can be paid in EMIs or deducted from the policy’s maturity amount.
- Risk: If not repaid, the policy may lapse, or the lender may surrender the policy to recover the loan amount.
Comparison: Loan Against Gold vs. Loan Against Life Insurance Policy
Additional Considerations
Interest Rates and Costs
Both loan types offer lower interest rates than personal loans. However, the value that can be availed in either case depends on the value of the asset. Loans against life insurance typically provides a longer tenure, reducing immediate repayment pressure.
Processing and Documentation
Loan against gold ornaments require minimal documentation, making them an ideal choice for urgent cash needs. On the other hand, loans against life insurance policy involves policy verification and assignment, making the process slightly longer.
Impact on Assets
Gold Loans: If you fail to repay, your gold may be auctioned, which could mean losing a valuable family heirloom.
Life Insurance Loans: Non-repayment can lead to the insurer surrendering the policy, impacting future benefits.
Loan vs. Surrender/Sale: What’s the Better Choice?
While taking a loan against an asset is often preferable to selling or surrendering it, the decision depends on financial and emotional factors:
- Life Insurance Policy: In most cases, taking a loan is better than surrendering the policy. Surrendering means losing insurance coverage and receiving a reduced payout, whereas a loan allows you to access funds while keeping the policy benefits intact.
- Gold: The choice between a loan and selling gold depends on the situation. If gold prices are high, selling may sometimes be financially beneficial. However, if the gold holds emotional or heirloom value, pledging it as collateral for a loan allows you to retain ownership while meeting financial needs.
Conclusion
Both loans against gold ornaments and loans against life insurance policies provide access to funds using collateral, but the best choice depends on your financial goals. If you need quick liquidity and can repay within a short period, pledging gold is a viable option. However, if you want a cost-effective loan while maintaining your gold assets, a loan against life insurance is a smarter alternative.
To explore the best-secured loan options for your needs, use our Sahi Secured Loan Tool.
At Mera Kal, we help you get the best loan solutions tailored to your financial needs.