Gold Loans With Overdraft Facility: How They Work And Who Should Use Them

Gold loans with overdraft facilities typically operate as flexible credit lines that allow borrowers to withdraw funds according to their needs. Customers can get gold-based revolving credit through these loans which operate similarly to credit card spending. Though the rate of interest on such loans together with the margin amount on overdraft loans match with those on gold loans, they provide higher flexibility than regular gold loans, which operate on the basis of equated monthly instalments (EMIs). 

How Do They Work?

The lender keeps your gold as collateral during the overdraft gold loan process by depositing it into a separate overdraft account instead of transferring the approved loan amount into your bank account. Your account will get a credit equal to the loan amount which matches the gold value you gave to the lender.

“The lender determines whether the overdraft account stands as a new account or it exists as a connection to your savings bank account. Lenders who provide overdraft accounts may include all current account benefits and features to their customers. The overdraft account permits you to take out funds at any time according to your needs. The gold loan amount allows multiple withdrawal options for users,” says Adhil Shetty, CEO, BankBazaar.com.

The lender may issue a debit card for the overdraw account which allows you to withdraw the loan amount as cash from an ATM. You can also obtain the loan funds by writing a cheque from your overdraft account. Certain lenders provide their customers with the option to perform online shopping and payment through their overdraft accounts.

EMI-Based Gold Loan Vs Overdraft Gold Loan

Both the EMI-based gold loan and overdraft gold loan allow you to access a particular amount of money depending on your eligibility. The difference between these two is that in the case of a regular gold loan, you borrow a lump sum amount at a time. In case you need only a part of the money now and the rest in, say, six months’ time, you will have to borrow a smaller amount and then to go for another loan, or borrow the entire amount in one go. You do not have the option of borrowing in parts, and you pay interest on the entire amount borrowed.

Overdraft loan, however, takes a different approach. For one, it is reusable. When a lender grants you an overdraft gold loan approval, you can withdraw funds from the credit line whenever you want. Let's say you have an overdraft amounting to Rs 5 lakh. In that case, you are free to draw from the credit limit by taking Rs 1 lakh or using the entire amount throughout the duration of the credit line period. The interest payments apply solely to the amount you have withdrawn from the credit facility.

Adds Shetty: “A customer who uses overdraft loans to cover upcoming expenses can establish financial protection against sudden requirements of funds. This option serves well when you want to maintain small loan options available because you might require additional financial support. On the other hand, a gold loan with an EMI option is best suited for making planned expenses.”