Lured by the growing appetite for gold among the middle class, many banks have started offering ‘gold purchase loans’. Among banks, Bank of India, Indian Bank, Corporation Bank, Canara Bank, State Bank of Hyderabad (SBH) and State Bank of Travancore offer this loan. Manappuram Finance also has this scheme.
Banks offer gold purchase schemes largely to working women. Bank of India’s Star Mahila Gold Loan scheme lends either 10 times your monthly net salary or a sum equal to your gross annual income. You can buy gold coins and bars. If you want to buy jewellery, it should preferably be hallmarked. Reason: Hallmarked jewellery has a benchmark price and if you are not able to repay the loan, the bank can sell the jewellery easily to recover its money.
Bank of India asks for a margin of 20 per cent. Non-working women with no income proof can also get this loan jointly with their spouse or any close relative qualifying the income criteria. The bank charges an interest of three per cent over the base rate of 10.50 per cent and a one-time processing fee of two per cent.
SBH lends up to Rs 15 lakh under a similar scheme at 13 per cent. Here, the margin is 25 per cent. The bank would deposit the remaining directly in the jeweller’s account. SBH has tied up with 15 jewellers, including Khazana and Kalyan Jewellers, for this scheme. “There is demand for this product and we expect a good response,” says M Bhagavantha Rao, managing director of SBH, on the launch of the gold purchase loan scheme.
But there’s a catch: You would be handed over the purchased gold only when you repay the loan. All such loans have to be repaid in a maximum of 60 instalments (five years).
Financial advisors do not favour this product. “Borrowing to purchase gold makes more sense if you have not saved up for occasions like weddings as you will need to cough up a lot of money at the eleventh hour. But, it is not a worthwhile proposition if you have to keep all purchases with the lender till you repay it,” says certified financial planner Suresh Sadagopan.
If you have repayment capacity for high interest loans, opt for a personal loan or use your credit card. While personal loans levy an interest rate of 14 to 24 per cent, credit cards charge up to 45 per cent on outstanding dues, depending on your credit profile.
Radhika Gupta, director at Forefront Capital agrees and suggests borrowing against investments. “Buying a home or a car on equated monthly instalments (EMIs) is an essential purchase. You do not need the burden of paying EMIs for buying gold — that too, at such high rates. If you want to take such a loan, taking a loan against bank deposit works out cheaper,” she says.
For a loan against fixed deposit, banks charge 2-2.5 per cent over the fixed deposit rate. And it is levied on the amount drawn and not the limit set. Say, you have a deposit of Rs 1 lakh earning an interest of 10.5 per cent a year. At 25 per cent margin, your overdraft limit is set at Rs 75,000. If you need Rs 30,000, you can withdraw it from the overdraft account at 12-12.5 per cent (2-2.5 per cent over the deposit rate). Interest will be charged on Rs 30,000 and not Rs 75,000. Loan against life insurance policies, at 9-10 per cent, also cost lower than the gold purchase scheme. And you can take the gold home immediately after purchase.