Ideally one should avoid taking loans unless it’s necessary to acquire an asset that would either enhance the future income or would save current expenses. Businesses also take short-term loans to meet their working capital needs.
However, in case of emergencies, one may have to take some loans to meet the unexpected rise in expenditure, especially if an adequate emergency fund is not there.
There are two types of loans – secured loans and unsecured loans. To get a secured loan, one has to pledge some asset as security, which may be sold to recover the dues if the borrower is unable to repay the principal and pay interest on it.
Due to the presence of underlying assets as security, secured loans are generally cheaper compared to unsecured loans. Loans taken to acquire assets are generally of this category.
On the other hand, in the absence of any asset as security that may be sold out to recover the loan amount, financial institutions generally charge higher interest on unsecured loans – like personal loans.
However, to make the interests on loans – not taken for buying assets – lower, one may keep investments (e.g. mutual funds, insurance, shares etc) or movable assets (e.g. gold, jewellery etc) as security, which may be sold to recover the loan amount in case of insolvency.
With costs involved to ensure the safety of gold lying idle, it’s best to take a gold loan, if necessary, to reduce the cost of borrowing as well as the cost of holding the physical gold.
“You may be surprised to learn that 80 per cent of Indian households have gold lying idle at home or in bank lockers! This gold can easily be economically leveraged to apply for a loan, as compared to other types of loans,” said Nitin Misra, Co-founder, indiagold.
“Think of it as someone owning a nice 1 BHK beachfront flat in Goa, then using it for only 1-2 months a year. Wouldn’t it be worthwhile to earn from it for the rest of the year by putting it up on Airbnb? Gold, as an asset, is similar in that sense,” he added.
Misra lists the advantages of taking gold loans:
- Gold loans come with low interest rates, and the flexibility to pay interest as well as principal at the end of the loan tenure – i.e. no hassling over EMIs.
- It involves no processing fees or foreclosure charges. Further, loan renewal or extension is free and simple.
- Gold loans can be availed of with minimal documentation, free of stringent T&Cs such as a regular income proof or credit score.
“So, in a country like India, where 83 per cent of the workforce is self-employed, gold loans just make sense,” Misra said.