For decades, Indian families have relied on their gold ornaments and jewellery to get them out of financial emergencies. Gold loans are readily available, even to individuals with low credit scores. Unlike other loans, gold loans come with minimal documentation, relaxed eligibility criteria and quick disbursal. 

Just like personal loans, there are no restrictions on the end usage of gold loans. You can use the amount for any purpose – to meet a medical emergency, to take your family on a dream vacation, to purchase the latest smartphone, take a course, pay for your child’s marriage and so on. Additionally, since gold loans are secured (the gold you submit to the lender acts as collateral), the interest rates on gold loans are significantly lower when compared to other unsecured loans like personal loans. 

All these factors combined make gold loans the most preferred choice for Indians to meet various financial requirements. This post discusses the two most popular types of gold loans: gold loans on EMI and gold overdraft loans. If you’re planning to take a gold loan, understanding the key differences between these two types of gold loans will help you choose the right one for your specific needs. 

What is a gold loan with EMI option? 

A gold loan with EMI works similar to other common loans like personal loans, car loans, etc. To get a gold loan with EMI, all you have to do is walk into your nearest gold loan company with the gold ornaments that you’re pledging. Once you submit the necessary documents, the loan officer will value your gold ornaments and provide you with a fixed loan amount. The sanctioned loan amount is credited to your bank account, and you can use it to meet your cash needs. 

Repayment of the loan amount is for a fixed tenure in the form of monthly EMIs. Once you have repaid the entire loan amount (principal + interest), you can retrieve the pledged ornaments. The repayment commences from the subsequent month following loan disbursal. This loan facility is available at banks, NBFCs and gold loan companies. 

How much loan amount is offered for gold loans?

Earlier, banks and NBFCs would offer loans only up to 75% of the value of the pledged gold. In March, the RBI allowed an increase in the LTV (Loan-to-Value) ratio up to 90%. So, today you can get loan amounts up to 90% of the value of the pledged gold. 

Gold loan interest rates vary from one lender to another. It ranges from 7.40% to 15% annually. The interest rate remains fixed throughout the loan tenure, and repayment is in the form of fixed monthly instalments. 

What is a gold loan with an overdraft facility? 

A gold loan with an overdraft facility is similar to a credit card. You get a predetermined limit. You can spend as much as you want within the permissible credit limit. The critical difference between a gold loan with OD is that the interest is charged only on the amount you use and not the overall available limit. 

Here’s how a gold loan with an overdraft facility works:

  • You walk into your nearest bank or gold loan company. You submit the required documents and deposit your gold jewellery as collateral. 
  • The lender values the gold and sanctions an overdraft facility up to 80% to 90% of the pledged gold. 
  • This loan amount is deposited into the overdraft account. You can withdraw money as and when you need it from the OD account. 
    • Some lenders allow you to withdraw the sanctioned amount using your debit card by linking it to your savings account. 
    • Others require you to open a new OD account, from where you can withdraw as and when needed. 
    • You can also access the OD account using cheques issued separately for the account. 

Unlike gold loans with EMI, where you have to repay it as fixed instalments, the borrowed amount in a gold loan with OD is repaid as a lump sum. However, you have to repay the interest charged monthly. Once you repay the entire lump sum, the loan account is closed, and the pledged ornaments can be retrieved. 

Similarities between Gold Loans with OD and Gold Loans with EMI facility 

Your gold ornaments are pledged as collateral 
No restriction on the end usage of the loan amount
The maximum loan amount sanctioned is 80% to 90% of the pledged gold
Minimal documentation and relaxed eligibility criteria 
Quick disbursal 

Differences between Gold Loans with OD and Gold Loans with EMI Facility 

Gold Loans with ODGold Loans with EMI
Interest is charged only on the amount you have withdrawn and not the entire sanctioned amount.Interest is charged on the whole loan amount.
Repayment is in the form of a lump sum (which includes both the principal and interest). You have to repay the interest on the OD periodically. Repayment is in the form of fixed EMIs.
The interest rate is a bit higher compared to gold loans with EMI facilities.The interest rate is lower when compared to gold loans with OD.
You can withdraw the required amount as and when needed.The loan amount is disbursed as a single sum during loan sanction.
No fixed tenure – the loan account is closed once you finish repaying the entire amount. You can also continue the OD facility if needed.Fixed tenure – The loan is closed once you repay the entire amount as per schedule. 

Is a Gold Loan with OD risky? 

Well, no! A gold loan with an OD facility is more flexible when compared to gold loans with EMI. The problem here is that not many people are comfortable operating an overdraft account. Hence they falsely assume it is risky. If you pay the monthly interest on time, then you don’t have to worry about the gold loan OD being risky. The interest varies depending on how much amount you have withdrawn from the OD account in a month. You can repay the borrowed amount into the OD account to restore the available balance. 

By staying on top of the interest payment and using only what you need, you can handle a gold loan with OD easily. 

So, which is the better option? 

It depends on how comfortable you’re using both these options and your fund requirements. If you require a bulk amount to meet a financial emergency, then gold loans with an EMI facility are the better choice. However, if you have monthly fund needs, then opting for a gold loan with OD gives you access to a credit line that you can dip into as and when required. 

In conclusion, a gold loan with an EMI facility is ideal for meeting a planned expense like home renovation, child’s marriage, etc. A gold loan with an OD facility is better suited for businessmen and self-employed who need access to a credit line periodically. 

Understand the features and differences between these two gold loan methods and choose the right option for you.

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