Better Alternative to Gold Loan or Personal Loan

Most of us are aware of gold loans where physical gold is put as collateral to get money on loan. Or Personal Loan which require other forms of collateral and comes at a high interest rate. However, not many people know that we can also use Sovereign Gold Bonds (SGB) as collateral to get loans. In this article, I will explain how to take loan via SGB, compare SGB Loan interest rate with Gold Loan Interest Rates in SBI, PNB, UBI and the reasons on why SGB Loan is better than gold loan or personal loan.

How to use SGB as Collateral for Getting Loan

Since SGB are secure investments backed by RBI, most of the banks accept SGB as collateral to give you a loan. So no more pledging those khandaani jewellery or your hard-earned assets if you need money. Just pledge your SGB and get a loan from most banks and NBFC.

Below is the process to use SGB as collateral for Loan:

Eligibility

All Indians above 21 years of age and holding SGB are eligible for loans. A loan against SGB can also be taken by HUF, Trusts, and Universities.

This article will focus on loan against SGB taken by individuals only.

Note – For SGB loan from State Bank of India (SBI), you must have SGB bond purchased via SBI (either physically from bank or via SBI Demat – SSL)

Type of Loan Available on SGB

Using SGB, you can avail two types of loans – Overdraft Loan and Demand Loan.

An Overdraft Loan is similar to a credit facility. You are authorized to withdraw an amount up to the maximum limit authorized by the bank whenever you need it. Interest will be applicable only on the amount withdrawn.

A Demand Loan is where you will be given the loan amount at one go and then you have to pay the Interest and Principle before the tenure of the loan ends.

Loan Duration

Loan period is usually between 1 year and 3 years for most of the banks. 1-year loans are normally called Bullet Loans or Demand Loans where you have to return the loan amount with interest within 1 year. 3-year loans are called Overdraft loans.

Using SGB, you can take an Overdraft loan for 3 years and a Demand Loan for 1 year from State Bank of India (SBI).

From Punjab National Bank (PNB), loan duration is up to the maturity of SGB (max 8 years). On Union Bank of India (UBI), this duration is 2 years for Overdraft and 1 year for a Demand loan.

Loan Amount

Depending on the bank chosen, loan amount will vary.

For SBI, using SGB, you can take a loan between 20,000 to 20 Lakh rupees. Similarly, PNB offers SGB loan between 50,000 and 10 Lakh, UBI between 50,000 to 25 Lakhs.

Margin

All banks keep a safety margin to ensure their money is not lost if gold prices crash in the future. On SGB, this margin is 35% for SBI, 30% for UBI and 25% for PNB.

For example, if you apply for a loan of 10 Lakh, then the bank will take SGB worth 10 Lakh from you. But it will give you a loan only between 6.5 to 7.5 Lakh. The remaining is kept as security to ensure banks do not suffer from a loss in case of a gold price crash.

Interest Rates

Interest rates on loan against SGB appear to be a little different from gold loan interest rate at SBI/PNB/UBI or personal loan interest rate.

SBI is offering SGB Gold Loan at 2% above 1 year Marginal Cost Lending Rate (MCLR) rate. So if MCLR is 7.25%, your interest rate for taking a loan using SGB as collateral will be 7.25 + 2 = 9.25%. In comparison, Gold Loan Interest Rate at SBI by pledging physical gold has only 1.25% spread over MCLR. So you will get it at 7.25 + 1.25 = 8.5%.

PNB is giving SGB loan at Repo Linked Lending Rate (RLLR) + 1.15% while the gold loan is available at RLLR + 1.95%.

Union Bank is offering at 1.85% (for Demand Loan) and 2.2% (for overdraft) above RLLR. In comparison, a gold loan is available at 1% above MCLR.

Personal Loans for most of the banks start range between 2 – 8% over MCLR/RLLR.

So in short, SGB Loans are certainly better than personal loans while being at par or slightly less than gold loans.

FYI – MCLR is usually controlled by bank and is an old system of deciding the interest rates. RLLR is based directly on Repo rate controlled by RBI. Read here to understand the difference between MCLR / RLLR in detail

Processing fees

SBI charges higher among 500 + Taxes or 0.5% of Loan amount + Taxes as processing fees.

As per PNB website, there are nil charges for loan against SGB. Information is not available for UBI.

How to apply

• For loan via SBI, you must have SGB bond purchased via SBI (either physically from bank or via SBI Demat – SSL). If you satisfy this criteria, fill in the application form along with list of documents – salary slip, form 16, 2 years IT Returns, Bank Statement of salary, ID proof, Address Proof
• For loan via Union Bank of India – Fill the application form with relevant details and go to nearest bank details. Following is the list of documents to be attached with application form:
  • DPN Note (Demand Promissory Note)
  • Letter of continuity
  • Letter of general lien and setoff
  • Agreement for pledge of Bonds and any other document stipulated in sanction.
• Details are not available on PNB website on how to apply for PNB loan. Best way will be to visit the bank with relevant documents mentioned for SBI and UBI.

Why to take Loan via SGB

• You will still get interest on your SGB even if you have pledged them as collateral
• As you cannot sell SGB for minimum 5 years after purchase, it is better to use these as collateral
• You will not be able to sell the pledged SGB (between 5th and 8th year) until entire loan is cleared
• If using old SGB which are nearing maturity, you will either get less tenure loans or will not be able to get loan
• Physical gold / ornaments might still be required at times. Pledging them means you will not be able to use them until you close the loan.
• Since physical gold valuation will be decided after appraisal, there are chances that you might get bad returns. This fear is not there in SGB. You get the entire eligible amount
• Unlike Personal Loans where interest rates change basis your credit score, SGB loans interest rates are fixed irrespective of your credit score
• SGB should preferably be in demat form and not expiring during the loan period
• Loan against SGB can be used to meet any personal needs such as Children’s wedding, paying off other high interest rate debts (especially credit card loans or personal loans), starting new business, overseas travel etc.

Conclusion

As I highlighted in my earlier article about 10 Reasons to Buy SGB, good returns and tax-free capital gains make Sovereign Gold Bonds very tempting. And being able to use SGB as collateral is icing on top. SGB win hands-down when compared to regular Gold / Personal Loans and should be a must-have on everyone’s portfolio.

References used for this article –

• SBI Website on Loans
• PNB Website on Loans
• UBI Website on Loans

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