Key Things To Keep In Mind Before Borrowing Gold Loan

In the first nine months of the fiscal year ending December 2024, Indian banks' gold loan portfolios surged by 71.3 per cent year-on-year, reaching Rs 1.72 trillion, as per a report by Business Standard.

Gold loans are increasingly becoming a borrowing option due to their accessibility and minimal documentation requirements. Unlike unsecured personal loans, gold loans are secured by the borrower's gold assets, leading to quicker approvals and lower interest rates. This makes them particularly suitable for urgent financial needs, including medical emergencies or educational expenses.​

The worth of gold keeps changing based on various factors, including inflation rates, economic factors, and geopolitical tensions.

In situations like economic volatility or rising inflation, gold is often considered to be a safe-haven asset, which leads to increased demand and inflated prices. Notably, when there is an increase in interest rates, that usually results in the decline of gold prices as investors move towards interest-bearing deposits.

Impact of Gold Price Fluctuations on Gold Loans

The amount sanctioned for a gold loan is directly linked to the market value of the pledged gold. Usually, the lender can give a loan worth up to 75 per cent of the pledged gold’s value, as per the Reserve Bank of India (RBI). When the gold price increases, borrowers can get higher loan amounts.

However, a drop in gold prices can pose challenges, lenders may ask for additional collateral or partial repayments to maintain the loan-to-value ratio within permissible limits.​

Factors to keep in mind before borrowing a gold loan

Valuation of Gold: The loan amount depends on the purity and weight of the gold pledged. The higher the purity is 18 to 24 karats) The higher the yields’ valuations.

Choosing a Credible Lender: It's always recommended to go for a reputable lender that is regulated by the RBI. Banks and non-banking financial companies (NBFCs) offer competitive lending rates while also ensuring the safety of pledged gold.​

Comparing Banks and Non-Banking Financial Companies (NBFCs): While NBFCs may offer more flexible evaluations, they often charge higher interest rates compared to banks. ​

Repayment Options: Different repayment methods are available, including:​

Bullet Payment: Repay the entire principal and interest at the end of the loan tenure.​

Upfront Interest: Pay the total interest upfront and the principal at the end.​

Regular EMI: Monthly payments covering both principal and interest.​

Overdraft Facility: Pay interest only on the utilised amount, suitable for varying financial needs.