Ten important tips before pledging gold? (Pt 2)
This article is the continuation from previous post.
Reclaim the gold items as soon as possible
Usually, Ar-Rahnu pledging has a duration of six months. However, it is highly encouraged to generate and return the borrowed money within six months. This way, we can save the custodian fees charged monthly. If the loan amount can be returned in a month, the custodian fee required to pay would be just for one month. Furthermore, there are no restrictions from the Ar-Rahnu offices from making early settlements.
Beware while pledging sealed gold items
As part of the procedure, the Ar-Rahnu office would want to test the purity of the gold items before approving our application. They would cut open the seal in this process, which would not be as presentable as before. Such products are charged at a spread margin of up to 25% if we sell to the gold company. Hence, kindly check with the Ar-Rahnu office if they are willing to accept the gold bar as it is without cutting open the seal.
Ar-Rahnu offices accept gold bars as they are without cutting open the seal. If the Ar-Rahnu centre has high confidence in the gold company (provided it is highly reputable), their process can occur faster. It depends on the policy of the particular Ar-Rahnu office, and checking with the officer would be highly recommended.
Do not buy gold using the 30:70 technique
Some gold agents might approach us, offering to buy gold using the 30:70 technique. This means that we pay cash 30% while the remaining 70% is delivered using the Ar-Rahnu loan. At first glance, this may sound like a good plan. With only 30% capital, we get to own a gold bar. But do not fall for such tricks without analysing the details. As they say, the devil is in the details.
The upfront capital might seem minor, but we are paying more than the actual gold price when seen in totality. The Ar-Rahnu loan that we make to complete 70% of the transaction has to be returned eventually. And this is along with the custodian fee, too. Can you guess who profits from this transaction if this is the case? You guessed it right! It is the seller!
Such tricks were rampant around 2012 when the gold price was at its peak. As the gold price crashed, the gold value decreased, but the Ar-Rahnu loan amount was not affected and remained the same. A lot of people got tricked by this scheme, unfortunately.
A person wanted to leverage this technique to own RM 10 million worth of gold with just RM 20,000 capital over five years. This was what the gold agent ‘pitched’ to this person. Upon further inquiry, it was found out that the story from the gold agent was just halfway. When the remaining part of the story was explained, then the true intention of the gold agent was realised. The plan may look nice on paper but always look for clarity in totality.
Take note of financial records (CCRIS, CBS, etc.)
Though the Ar-Rahnu loan is made with gold items as collateral, these transactions would appear in our official financial records. These include Central Credit Reference Information System (CCRIS) in Malaysia or Credit Bureau Singapore (CBS) in Singapore, or the local authorities where you are residing.
Usually, the Ar-Rahnu offices under the purview of banks would have similar policies such as Agrobank Ar-Rahnu, Bank Rakyat Ar-Rahnu, etc.
What is the implication of this, you may think?
When we apply for loans with any banking institutions, they will perform due diligence checking on us, and one record they would refer to is the credit score. If we own one Ar-Rahnu pledging contract, this would appear in the record. What if we own ten pledging contracts? Yes, there would be ten lines indicating the loan amount. This would give an impression that we have a lot of loan facilities.
Here, gold pledging with Ar-Rahnu is not to be taken lightly. If left unaddressed and the gold gets auctioned off, it would leave a negative mark on our record. We should, by all means, avoid this scenario. Be upfront with the bank officials during the loan application regarding Ar-Rahu pledging contracts to have better solutions.
Take a couple of pictures of the gold items before pledging
It is recommended to take a couple of images of the gold items before pledging at Ar-Rahnu offices. We can sell the pledging contract to a willing buyer if things do not work out for us. This way, the gold would not be auctioned off, and our names would not get black-listed.
While finding a buyer, they would want to look at the gold items before making decisions. This is where the picture would be helpful. This is true, especially for gold jewellery items. The buyer would be interested in looking at the design, and if it fits their taste, they might consider buying it. Hence, having pictures would make our search relatively easy.
The tips mentioned above are the ones we ought to bear in mind before we proceed to pledge gold items at any Ar-Rahnu centre. Kindly plan out the strategy and calculate the costs involved. Do not blindly pledge the gold items only to find ourselves stuck with numerous contracts. This is a big No-No. The profit potential via the Ar-Rahnu manipulation strategy may not be high, but the loss potential would be much more significant.
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Your buddy on gold investing,
Naresh G