A financial emergency can occur at any time and to anyone. Are you facing one but have a low credit score? As long as you have a sufficient amount of gold in your bank locker, consider yourself covered. You can avail an overdraft facility against gold to get yourself out of a financial emergency.
Just like personal loans, banks don’t check on the purpose for which you need to use this facility.
Whether you need to fund a vacation, children’s higher education or need to meet any other urgent financial requirement, an overdraft against gold is a quick and easy solution for the same. Additionally, since this form of gold loan is secured against the loan, the interest rates are much lower than those applicable on term loans
. Is this the reason why overdraft facility against gold is taking over term loans? Read on to find out.
What is a gold loan with an overdraft facility?
with overdraft facilities are categorised under the “use-as-you-need” credit facilities. Under this, when you pledge gold, the bank will credit money in your bank account and only charge interest on the amount withdrawn as against the entire amount.
In this type of loan, the loan amount is the overdraft facility. It is similar to a credit card, in that, you can spend as per your needs but within the allowed limit as per loan terms. The interest rate on the loan is applicable only on the amount used.
Let’s understand how this loan works:
What are the benefits of an overdraft facility against gold?
- When you offer gold as collateral against this loan, the bank will open an overdraft account.
- The loan amount is credited in the account for the value of gold pledged.
- Some banks may allow withdrawal of gold loan amounts at the bank ATMs using a debit card.
- Many gold loan accounts may be linked to a savings bank account or a fresh overdraft account may be opened.
- Some banks may even open a fresh account with the benefits of a current account.
Lesser eligibility criteria, less documentation, and immediate loan disbursal are some of the main benefits of these types of loans. Gold loans may come in different schemes to suit individual financial requirements, one of which is the overdraft facility.
An account holder can access the loan amount using
a cheque issued specifically for the overdraft account.
The interest rates on the overdraft facility are generally higher than a regular gold loan account. The repayment option in an overdraft facility is usually a lump sum and it can be closed at any time.
Are there any risks involved in a gold loan with an overdraft facility?
Many borrowers of such loans may not be used to operating an overdraft account. Thus, they may not be aware that monthly servicing of interest is very critical.
Borrowers should ensure that their outstanding loan is well within the credit limit offered against gold that has been deposited with the bank. This is especially important for maintaining a good credit score.
Even if one utilises an amount within the sanctioned limit, it is still considered a loan. Therefore, one must pay the interest amount on whatever value has been used through the overdraft account.
What are term loans?
Some important points to know about term loans are:
Why are term loans less preferable?
- These are generally offered for acquiring land, construction of buildings, buying machinery, or buying commercial vehicles.
- Term loans can be medium to long-term, with tenures ranging from 5 to 10 years. The tenure may be extended for manufacturing and trading businesses.
- Before granting the loan, banks may evaluate the project from a technical and economic standpoint.
- The interest rate on a loan is determined based on factors such as the riskiness of the project, loan value, credit standing of the borrower among other factors.
Here are the top reasons why overdraft facility on a gold loan is increasingly preferred over term loans:
- In a term loan, if the borrower fails to make repayments, the lender can question the liquidity position of the business and this can impact the company’s existence.
- Debt financing can add to the overall financial risk of a company while also adversely affecting the benefits available for shareholders.
- Apart from the collateral security, the term loan borrower has to follow the restrictive covenants stated by the lender.
- Term loan borrowers must close the existing loan while maintaining the asset base before taking another loan. This can result in increased interference by the bank in the business functioning.
All of these points can be easily avoided with an overdraft facility against gold.
Borrowers are increasingly relying on sourcing loans that involve less lender interference and offer lower interest rates combined with longer tenures. All these features can be easily availed through an overdraft facility against a gold loan. No wonder then, that these are preferred over other options like term loans.