Surging gold prices mean families can get better loans on their jewellery, but high valuations should not be the sole reason for taking such credit. Customers should understand the full cost and risks of such loans.
Gold loans are linked to the metal’s market price. Lenders assess the purity and weight of jewellery and then apply a loan-to-value (LTV) ratio — capped by the Reserve Bank of India (RBI) — to determine the loan amount.
When prices rise, the same amount of gold fetches a higher valuation. It means:
-
A larger loan can be sanctioned for the same jewellery -
Borrowers may be tempted to take higher loans than required -
However, the LTV cap still applies, and the final loan amount depends on both price and regulatory limits.
How a gold loan works
Jewellery is pledged as collateral in a gold loan
The lender checks purity (usually 18–24 carat) and weight of jewellery
The current market price is applied to determine value
Loan sanction: A percentage of this value is offered as a loan
Funds are credited, often within the same day
The borrower repays principal and interest within the agreed tenure
Jewellery is returned after full repayment
As the loan is backed by collateral, documentation tends to be minimal compared to unsecured loans.
Interest rates and repayment structures
Gold loans do not have a single standard structure. Costs depend on interest:
Regular EMI loans: Monthly instalments include both principal and interest
Bullet repayment: Interest may be paid periodically, with principal due at the end
Upfront interest schemes: Interest is deducted at the time of disbursal
The quoted interest rate alone does not capture the full cost. Borrowers should also check:
Processing fees
Penal charges for delayed payment
Auction-related charges in case of default
Regulatory limits
The RBI prescribes an LTV ratio for gold loans, which effectively caps how much can be borrowed against the value of gold. This is meant to limit risk for both lenders and borrowers.
For borrowers, this means:
Even if gold prices rise sharply, borrowing is restricted to a percentage of value
A higher loan amount today also implies higher repayment obligations later
Risks that are often overlooked
Gold loans are frequently positioned as quick and simple, but several risks require attention:
Risk of auction on default
If the borrower fails to repay within the agreed tenure, the lender has the right to auction the pledged gold to recover dues. This can result in permanent loss of the asset.
Price volatility impact
If gold prices fall after a loan’s purchase, lenders may ask for partial repayment or additional collateral in some cases, especially in longer tenures.
Over-borrowing
Higher gold prices can create a false sense of affordability. Borrowing more than needed increases interest burden and repayment stress.
Short tenures
Gold loans are typically short-term products. Borrowers relying on them for long-term funding may face rollover costs or repeated borrowing cycles.
Common misconceptions
“Gold loans are always cheaper”
While often cheaper than credit cards or unsecured personal loans, rates can still be significant depending on the lender and scheme.
“The process is risk-free”
The risk is not in getting the loan, but in repayment. Default can lead to loss of jewellery.
“All lenders offer similar terms”
Terms vary widely across banks, non-banking finance companies, and local lenders, particularly in valuation and charges.
What borrowers should check before taking a gold loan
Before pledging gold, borrowers should evaluate:
Exact LTV offered: Not just the maximum allowed, but what the lender is actually offering
Effective interest cost: Including all fees and charges
Repayment schedule: Whether it aligns with expected cash flows
Auction policy: Timeline and notice period before gold is auctioned
Prepayment terms: Charges, if any, for early closure
It is also advisable to borrow only for clearly defined, short-term needs rather than discretionary spending.
(with inputs from PTI)
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