Gold loans can perfect your personal finance goals

Managing personal finance to perfection is our constant endeavour. We often undertake an elaborate exercise, wondering which investments or loans suit our immediate and long-term needs. Yet, many ignore the simple rules of personal finance management and juggle with credit card borrowings and personal loans while even tapping friends for stop-gap financing. But often some of us overlook the easiest of the credit options, gold loans when it comes to paying an advance for a vehicle or a business, property registration fees, a foreign trip, or even medical bills.

Amazingly, almost all households in India have gold in some measure as they collectively own around 27,000 tonnes of the precious metal, valued at $1.5-2 trillion. However, such a colossal asset adds little value to many of the holders or the nation at large since only 7% of it is being productively used, especially as a collateral against credit. While many consider it as a cherished family asset, it can work wonders - not just in emergency - but in almost all scenarios where one wants money to fulfil an aspiration or a day-to-day need.

One example is the big benefit in terms of lower interest rates; gold loans come in the range of 8-16% on an average while personal loans begin at 12% and above. Also, lenders charge lesser processing fees and foreclosure charges for a gold loan, but in the case of personal loans, these are much higher. Hence the savings that you generate can be deployed to earn more through other investment options thus adding much value to your personal finance management.

Let us explore the advantages of gold loans against other credit options.

A simpler process: In general, gold is a liquid asset and loan eligibility is up to 75% of the value of gold, based on its purity, weight and the current market value. Once the evaluation process is done by the lender, your loan gets sanctioned and you get your money in your account immediately.

Though simpler to process, a personal loan depends much on your creditworthiness and income. However, it does not need any collateral in the form of gold or any other asset. Lenders would use credit scores such as CIBIL and an occupation profile with a steady income among others to make up for the lack of a collateral. The same reason also leads to higher interest rates.

Faster turnaround time: Gold loans are one of the easiest credit options, disbursed in just under few hours due to the simple process. Neither the lack of credit scores nor the applicant’s ability to repay can hinder the application.

Higher loan amount potential: Unlike the personal loans, often disbursed in the range of Rs 1 lakh to Rs 10 lakh depending on the individual’s capacity to repay, gold loans don’t have such limitation since the loan allotment is purely on the basis of the collateral provided. Thus, in many instances where a short-term payment is required, gold loan works as the perfect solution, without adding much to your financial burden.

Comparative loan tenures: Though gold loans are seen as short-term solutions, it can also be taken for a longer tenure, say for up to 3 years. In personal loans, loan tenure is a function of the profile and the repayment capacity of the borrower. The biggest advantage of gold loans is the flexible repayment options which include monthly, quarterly and annual interest repayments with the principal repayment being done at the end of the loan tenure.

Interest rate: Gold loans, being a secured credit, flaunt a lower interest rate. The interest rate also depends on the quantity and purity of the pledged gold, the total loan amount and the repayment tenure. Generally, banks offer lower rates than NBFCs with a wider choice of repayment modes including bullet options and repaying both interest and principal components at the end of the loan tenure. One may choose a lower fixed interest rate per month than a floating rate which may help you understand your liabilities and plan the budget.

Gold loans are slowly becoming an accepted and a respectable way of financing different needs that occur at different junctures in our lives. In fact, the credit hungry urban India and the modest rural areas are also considering pledging gold jewellery to finance their dreams. According to a CIBIL survey in December 2023, the gold loan industry's advances stand at Rs 7.15 lakh crore, having grown at a CAGR of 19 per cent for the last three years. Yet, we have only pledged 5,300 tonnes of this massive store of value.

Given the Indian economy’s high growth momentum and our increasing aspiration to improve our general lifestyle, managing our personal finance is becoming more important than ever. Here, gold loans can be a valuable financial tool when used wisely.

The author is the President – Retail Agriculture and Gold Loans, Kotak Mahindra Bank Limited