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Why Gold Loans Are Better Than Overdrafts Against FDs?

There are a range of loans offered by banks, NBFCs and other financial service providers for different needs. However, the categories of loans are divided into secured and unsecured loans. As the name suggests, secured loans require borrowers to pledge an asset or security for the money borrowed. Meanwhile, unsecured loans are not backed by any collateral. Gold loans and bank overdrafts both fall under the category of secured loans. But why are gold loans better than overdrafts against FDs?

Under gold loan, a borrower pledges his gold items as collateral to borrow money from financial service providers. This type of loan is especially useful in emergencies. Banks take your gold as collateral for a set period of time, which can be the life of the loan. While interest is charged from borrowers, which must be paid in the form of EMI’s. Once a borrower has repaid the entire loan, banks return the physical gold investments. Generally, however, physical gold between 18k and 22k is accepted as collateral.

In early August, the RBI eased the loan-to-value ratio for gold loans to 90% from the previous 75%.

With regard to the current account credit against fixed deposit, this type of loan is considered a prominent form of investment, as you can opt for both short-term and long-term financial needs. Typically, your FDs are used as collateral to avail loans for various reasons, be it for educational purposes or even to purchase products.

Banks typically offer 90% overdrafts against the FD value. Some of the advantages of overdrafts over FDs are: Loans can be drawn even if your credit rating is low and you don’t meet the income criteria because FDs are held as collateral. The interest rate that has to be paid back on these loans is low, a little over 1-2% higher than the rates offered for FDs. You can also use the FD amount to pay off loans and reduce your EMIs.

Which is Better: Gold Loans or Bank Overdrafts vs. FDs?

According to Umesh Mohanan, Executive Director and CEO of Indel Money, Gold Loan wins over other secured lending options, including FD overdrafts, primarily because of its ease of availability. The gold loan offers simple documentation, faster payouts and flexible terms. One can enjoy tax benefits on gold loans when the funds are used to build or buy a home, finance renovations, business expenses, etc.

Meanwhile, Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo explains that gold loans prove to be of great value in emergency situations as they can be easily availed with faster processing and the requirement of only a few essential documents . Since this is a secured loan, a poor CIBIL score will not prevent you from getting faster approval. In fact, one can improve one’s credit rating by making timely payments to the EMI.

Manchanda also highlights that if you took out a loan against gold for the purpose of renovating, building or buying a residential property, you can claim a tax deduction of up to 1.5 lacs under Section 80C of the Income Tax Act 1961 on repayment . You can also claim a tax deduction up to Rs. 2 lakhs on interest paid in any year under Section 24 of the Income Tax Act 1961 on the construction or purchase of a home. Please note that gold loans for personal use do not have tax benefits.

Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms and not Mint.

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Richard Dement

The author Richard Dement