Anuj Arora, COO and CoFounder of SahiBandhu

While gold is most often associated with jewellery, it is nevertheless a much more important asset. A time-tested investment that continues to hold merit over other investment options since time immemorial, gold is certainly more than just a precious metal. With an annualized return of 11% and compounded CPI index of 6.3% over the last decade, gold is an excellent inflation-proof investment option. Additionally, it can also come in handy in times of need to procure a quick gold loan. 

If you are looking for hassle-free financial aid to navigate through personal exigencies, a gold loan is undoubtedly the way to go. To help you reach a decision by clearing your apprehensions regarding choosing a gold loan to meet your financial needs in 2023, we bring you a detailed analysis of the pros and cons of opting for a gold loan. Read on:

Merits of Gold Loan

Lately, the gold loan has emerged as an increasingly popular financial product across demography in India.  State Bank of India (SBI), the country’s largest lender, holds 24% market share in gold loans across the industry. Statistics from a report by the Finance Industry Development Council (FIDC) reflect an increase of 102% between 2019 and 2022 for gold loan disbursals. These figures highlight the increasing trust that consumers are investing in gold loans as a legitimate rescue from financial crises, largely owing to the following factors:

Quick disbursal

Unlike other loans, gold loans do not require a borrower to fulfil the stringent criteria for the loan to be disbursed. Minimal documentation, combined with an increasingly digitised process that is fast and efficient, greatly reduces the time required to process the documents submitted by the borrower along with the loan application. This enables lenders to disburse the loan amount to the borrower in a quick and hassle-free manner, and that too within a few hours. 

Also Read: Wedding season 2023: Is it a good time to buy gold?

Lower interest rates

While other financial products like personal loans incur heavy interest rates, those of gold loans are significantly lower. Personal loans usually levy interest rates ranging from 10.50% p.a. to 36% p.a., which could make the repayment amount much higher than the principal loan value. However, interest rates on gold loans start as low as 7% p.a. Opting for collateral security in gold loans can further reduce the interest rates, making the repayment much lighter on the borrower’s pocket than other loan options. 

Flexible Repayment

One of the most pressing concerns for people looking to borrow money is loan repayment. While conventional loan options provide limited repayment methods in the form of upfront payments or equated monthly instalments (EMIs), gold loans typically offer a wide range of repayment options. You can choose from the following alternatives depending on your repayment ability:

  • EMIs, by paying a part of the principal and interest amount every month.
  • Making interest payments on a quarterly/semi-annual/annual basis and paying the principal amount towards the end of the loan tenure.
  • Paying the total interest upfront and paying off the principal amount at the end of the loan tenure.
  • Paying off the entire due amount, i.e. the principal and the interest, at the end of the loan tenure.

In addition to these, you can also opt for a loan foreclosure. While conventional loans also offer foreclosure facilities to borrowers, they usually levy some foreclosure charges. However, in the case of most gold loans, foreclosure comes free of charge, which means that you can get the loan closed off by paying the entire due amount at your earliest convenience.

Also Read: City-Wise Gold and Silver Rates

Credit history doesn’t get factored in

For most borrowers, a low or non-existent credit score is a matter of grave concern. The credit score of the borrower heavily influences the interest rate for conventional loans. However, since the interest rates for gold loans depend upon the amount of gold kept as collateral and the rate of gold, the credit history of the borrower is not taken into consideration, enabling people with low or no credit scores to avail of financial services without any hassle.

The other side of the gold coin

Like in the case of any financial services, gold loans also involve certain factors that some lenders might not find to be desirable. These include:

  • Gold loans lay great emphasis on the weight and purity of the gold that is kept as collateral. It is only after examining the gold on the basis of these two factors that the loan amount for disbursal is decided upon by the lenders.
  • The Loan-to-Value Ratio (LTV) has been capped at a maximum of 75% by the Reserve Bank of India (RBI), which means that the maximum loan disbursal amount can be only up to 75% of the value of the gold placed as collateral. 
  • In the unfortunate event of the borrower being unable to repay the loan, the gold kept as collateral gets confiscated by the lender.

The Verdict

Gold loans make an excellent option for people looking to borrow money to achieve their personal goals or alleviate their lifestyle in 2023. With added convenience in form of minimal documentation, faster processing and flexible repayment options, a gold loan is certainly the way to go for you to fulfil your financial needs this year. 

(By Anuj Arora, COO and co-founder of SahiBandhu)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online)