Gold loans surge in demand: Key points to consider before borrowing

Gold loan: Demand for gold loans has surged significantly as gold prices climb and access to unsecured credit becomes more limited. In September, gold loans rose by an impressive 51%, outpacing the 11.4% growth in personal loans. Despite this increase, it’s essential to note that the gold loan market size is just 10% of the personal loan market, with Rs 1.47 lakh crore in gold loans compared to Rs 14.27 lakh crore in personal loans.

“The demand for gold loans has risen due to several factors,” explains Sumit Sharma, Founder of Radian Finserv. “With global uncertainty driving up gold prices, gold has become a more attractive asset, both as an investment and collateral. As unsecured credit becomes less accessible, gold loans offer a reliable, collateral-based alternative. They’re quick to process, require minimal documentation, and offer a flexible solution in uncertain economic times.”

Another reason is the tightening of unsecured loans. Post Covid there was a sharp rise in unsecured loans, therefore, to prickle the bubble the Reserve Bank of India (RBI) recently increased risk weights on unsecured personal loans, which meant banks and non-banking financial companies (NBFCs) had to reserve more capital against such credit card and personal loans. 

Moreover, with experiences getting preferences over investments, experts say youngsters are increasingly pledging their gold for consumption and travel needs.   

Key considerations before taking a gold loan

With gold loans becoming more popular, it’s important for borrowers to understand key aspects before committing. Firstly, be aware of the Loan-to-Value (LTV) ratio, which determines how much you can borrow against your gold. According to Sharma, “The regulatory cap is typically 75%, so any offers beyond that might indicate non-compliance with regulatory standards.”

Interest rates, repayment options, and associated conditions are also crucial factors. Comparing rates, fees, and penalties can have a major impact on overall repayment costs. “Understanding the repayment terms, whether it’s a lump sum or monthly installments, is essential to align with your financial plans,” Sharma adds. Additionally, transparent valuation of the pledged gold ensures that you receive a fair loan amount reflective of current market prices.

Gold loans are secured, so failure to repay could put your gold at risk. Ensuring timely repayments not only protects your assets but also builds your credit score, while missed payments can harm your score and lead to asset forfeiture.

How a gold loan works

A gold loan functions like any other secured loan, backed by a gold as collateral, an interest rate is paid over a selected repayment period. Once the full repayment, including interest, is made, the borrower retrieves their pledged gold in the same condition. Many lenders offer options like part-payment and part-release of gold, providing flexibility in managing repayments.

Meanwhile, gold price movements can affect gold loans. If prices decline significantly, borrowers may need to repay part of the loan to maintain the LTV ratio or pledge additional gold. Conversely, when gold prices rise, borrowers may be eligible for a higher loan amount based on the increased value of the collateral.

Steps to obtain a gold loan

Securing a gold loan is straightforward. Borrowers can either visit a branch, use the company’s website, or download a mobile app to initiate the process. Some companies even offer home services, allowing customers to access gold loans from their homes.

For online applications, a gold loan calculator helps estimate the loan amount based on the weight of the pledged gold. After filling in the necessary details and selecting from various loan schemes, a representative from the lending institution will reach out to finalize the process.