Guide For Home Loans & Gold Collateral Loans-What No One Tells You

by posted in Mixed Bag

Introduction

Financial assistance from banks when buying a house is almost inevitable in the present economy where inflation is on the rise and earning potential not so much. If you are out in the market to buy a place you can call home, most probably after finding the ideal property, you started looking for ways to get home loan sanctioned. It is not just you, almost every home buyer in his 30’s or 40’s is dependent on home loans to afford a home for his family.

Some people choose to apply for gold collateral loans for the same need, given the fact that Indian households have gold deposits from generations that sit idle in safes. But whether you choose to apply for a home loan or gold loan, it is important to educate yourself about the facts that lenders don’t tell you.

Let’s start with home loans first.

Home loans are a long-term commitment and can be taken for a period as long as 30 years. Before you apply for a home loan you need to know that almost 65% of your income will go towards the Equated Monthly Installments or EMIs. This is why make sure you are ready for such a long period obligation without hurting your future.

Be Smart While Estimating Home Loan EMI

A common mistake most first-time home loan applicants make is to opt for the maximum loan tenure they are eligible for without understanding the long-term consequences. Let’s understand it with an example:

Suppose you available a home loan of INR 30,00,000 from the bank at an interest rate of 8.7% for a period of 15 years. In this case, the total interest paid to the bank is INR 23,81,090. Now if you opt for a longer tenure say 20 years for the same loan amount at the same rate of interest, you will end up paying the bank INR 33,39,765, which is 40% more than the interest paid in just 5 years.

Unless you are comfortable in making banks richer with your own hard-earned money, there is no reason why you should choose a longer tenure than you can comfortably repay your loan.

Pro Tip-Based on your loan EMI, choose the shortest loan tenure in which you can comfortably repay your loan.

 

Home loan Interest Rates-Fixed Rate or Floating Rate

Banks and Non-Banking Financial Companies lend home loans at fixed interest rates and floating interest rates. Based on the current money lending scenario in India, experts suggest that one should opt for floating rate loans as market trends indicate a decline in home interest rates in coming months. Furthermore, unlike fixed rate home loans, there is no prepayment penalty (amount paid as a fine for pre-closure of loan before the set tenure).

Fixed rate loans are suitable for borrowers who cannot handle any additional financial burden that can arise because of an increase in interest rates. That being said, the interest rate of fixed rate home loans is higher than floating rate loans. Also, fixed loans are seldom fully fixed and most banks change them into floating loans after a time period. Usually, a fixed rate period is anywhere between 1 to 10 years while the loan tenure can be up to 30 years.

LIC Housing Finance customers often complain of a sharp rise in their home loan interest rate when it is converted from a fixed to a floating rate.

Pro Tip-Choose Floating Rate home loans over fixed rate loans

Eligibility for home loans

Both banks and NBFCs decide your eligibility for home loans based on your credit report. We have covered this topic in detail in our CIBIL Score Guide. A healthy credit score is important to get the maximum loan amount. Financial institutions are allowed to sanction a loan up to 80% of the property value, but how much loan will be sanctioned depends on your credit report.

However, for gold loans, your credit report has almost nil impact on loan eligibility.

Gold Collateral Loans

In Indian culture, the concept of pledging gold for money is nothing new and the practice has been around for centuries. With the entry of banks and NFBCs in the gold, loan domain has made this practice more formal and regulated.

Unlike home loans, gold loans are a lot cheaper but short-term credit solutions. Lenders market gold loans aggressively which results in people getting into an agreement with financial institutions without understanding the nitty-gritties of the gold loans.

Here are the things you should know about gold collateral loans:

  1. You can avail only up to 80% of the gold’s value you keep as collateral.
  2. Interest rate on gold loans varies between 13% to 16% which is payable in EMIs for a period of 12-60 months.
  3. There is no strict eligibility requirement for gold loans, unlike home loans. Anyone above the age of 18 can pledge his gold for a loan.
  4. God jewellery is less valued than gold coins and bars of higher purity for gold loan.

Gold collateral loan is beneficial in a number of situations. As we mentioned in our Understanding CIBIL Score guide a poor credit score makes it very difficult for an individual to avail loans from banks and NBFCs. As gold loans are secured loans, even with a poor CIBIL score you can get a gold collateral loan.

Furthermore, unlike home loans, you can choose to pay only the interest component of the gold loan and the principal can be paid at the end of the loan tenure as a lump sum. For individuals involved in agriculture, gold loan is available at as low rate of interest as 8%.

 

What to beware of?

Gold loan lenders are legally eligible to sell the deposited gold if there is a repayment default. If for some reason you default on gold loan repayment or EMI you not only lose your gold, you lose it at a cheaper price as the Loan-to-Value ratio is a maximum of 75%.

Where to apply for home & gold loan-A Bank or A NBFC?

Here’s a concise comparison of features between home loans availed from banks and home loans sanctioned from NBFCs.

Type of Loan-Home Loan
Features Banks NBFCs
Eligibility Criteria Stringent background checks and credit report analysis Much faster and easier, chances of availing loan with poor credit score is high
Interest Rate Benchmark* MCLR PLR-Spread
Pre-payment Penalty Pre-payment charges applicable Pre-payment charges applicable, often higher than banks
Interest Rates Rate of interest is comparatively lower Mostly higher than banks

 

*Know about MCLR and PLR interest rates here.

 

Here’s a comparison of features between availing gold collateral loans from banks versus gold loans from NBFCs.

 

Type of Loan-Gold Collateral Loan
Features Banks NBFCs
Time Taken Up to 4 hours Almost instant disbursement of loan amount
Loan Repayment No flexibility in repayment NBFCs allow you to pay only interest rates monthly, principal can be paid as lump sum at the end
Pre-Payment Penalty Pre-payment charges applicable In most cases, NBFCs do not charge a pre-payment penalty
Interest Rates Rate of interest for gold loans is lower Higher interest rates

 

Banks and NFBCs have their respective flaws and benefits, it is upon you to be an educated borrower when applying for loans.

We hope our guide has helped you clear your doubts regarding home and gold loans.

 

 

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