Summary of this article
Borrow only what you need despite higher gold loan eligibility.
Understand all charges, repayment terms and lender policies carefully.
Keep repayment disciplined to manage risks from gold price fluctuations.
Gold prices have corrected sharply from the record highs seen earlier this year, after touching around Rs 1.82 lakh per 10 grams. Despite the decline, prices remain significantly higher than they were a year ago, allowing borrowers to access larger loan amounts against the same quantity of jewellery as they could last year. Nevertheless, the recent correction also highlights risks of borrowing aggressively against gold, with some lenders issuing margin calls to borrowers whose loan-to-value (LTV) ratios have risen following the fall in prices.
The recent movement in gold prices also underlies that while gold loans are one of the fastest and most popular paths to short-term liquidity, borrowers should not assume that high gold prices or higher eligibility will continue throughout the loan tenure.
Gold loans are secured loans where lenders sanction funds based on the purity, weight and value of pledged gold, subject to the LTV limits prescribed by the Reserve Bank of India.
Borrow According To Need, Not Eligibility
Higher gold prices over the past year have increased borrowing capacity, but borrowers should avoid treating the maximum eligible loan amount as the amount they should borrow.
Vishal Singh, Managing Director and Country Head, Assets and Strategic Alliances, Consumer Banking Group, DBS Bank India, has stated that the higher value of pledged gold allows customers to raise funds for purposes such as education, business expansion, home improvements and other planned expenses without selling their jewellery.
However, he said borrowers should align the loan amount with their financial requirements and repayment capacity.
"Although the value of the pledged gold determines borrowing capacity, the more important consideration should be the actual amount required for the intended purpose and the ability to comfortably service the loan," Singh said.
He added that gold prices can fluctuate over time, making prudent borrowing important even when loan eligibility increases.
Borrowers who leave some cushion instead of borrowing the maximum permissible amount are generally better placed to absorb a decline in gold prices without having to bring in additional funds or pledge more gold.
Understand The Total Cost Of Borrowing
The interest rate is only one component of a gold loan. Borrowers should also understand how lenders determine the loan amount and evaluate all associated charges before making a decision.
"Customers should also familiarise themselves with how loan eligibility is determined, including the role of gold purity, net weight, and applicable LTV guidelines. Equally important is understanding the overall cost of borrowing, which includes processing fees and other charges, rather than comparing interest rates alone," Singh said.
He also said borrowers should consider factors beyond pricing, including the safety of pledged jewellery, transparent appraisal processes and secure storage practices. Since many lenders now offer digital servicing, repayment options, online account access and customer support can also influence the borrowing experience.
Another thing that borrowers should understand about a loan is the method of repayment. Typically, the outstanding balance of a bullet repayment loan is kept high for the entire loan period as compared to the EMI-based repayment. This makes them potentially more sensitive to a rapid drop in gold prices, leading to a fall in the LTV ratio.
Be Prepared For Gold Price Fluctuations
The recent correction in gold prices has demonstrated that gold values can move in either direction during the loan tenure. A sharp fall can increase the LTV ratio and prompt lenders to seek corrective action in accordance with regulatory guidelines.
"If prices decline significantly, lenders may review the LTV and, where required, will typically work with customers on appropriate corrective measures in line with applicable guidelines," Singh said.
To reduce this risk, Singh said borrowers should avoid taking the highest loan amount available against their jewellery.
"Borrowing based on actual funding needs rather than the maximum eligible amount can provide additional flexibility and a buffer against price fluctuations," he said.
He also advised borrowers to maintain a disciplined repayment schedule, choose a repayment option suited to their cash flows and respond promptly to any communication from the lender. Planning repayments in advance can help reduce the outstanding loan balance over time and lower the risk of losing pledged jewellery if gold prices decline sharply or repayment obligations are not met.
Responding promptly to requests for additional repayment or collateral, where applicable, can help prevent the loan account from becoming stressed and reduce the risk of losing pledged jewellery.
