People often say a gold loan is the smartest kind of borrowing. The arguments sound convincing: it is quick, it does not need a credit score, the interest looks lower than a personal loan, and the gold always comes back once you repay.
For a family facing sudden expenses, it feels like the perfect solution.
That belief has only grown in recent years. RBI data shows that gold loans have nearly doubled, rising to more than ₹1.7 lakh crore. Households across the country are pledging jewellery at record levels, making it one of the fastest-growing forms of credit.
But the reality is far less comforting.
Many families do not notice how repeated pledging and constant interest payments slowly eat away their wealth. What begins as a short-term fix often ends with jewellery lost forever, and with it, the trust and security it once represented. That is why this story needs to be told, because the damage of gold loans is far more common than we think.
Why Gold Loans Are Not as Safe as They Appear
Gold loans are sold as the most secure kind of borrowing. The pitch is simple: your jewellery is collateral, so the lender’s risk is low, and in return you get quick money at a fair rate.
Families believe that once they repay, the gold will come back exactly as it was. This sounds fine, to be honest.
The problem is that the numbers tell another story.
NBFCs and banks charge anywhere between 9% and 20% interest on gold loans. Many people focus only on the fact that it is “cheaper than a personal loan,” but over time, the interest adds up. If you keep rolling over the loan or taking new ones against the same jewellery, the interest you pay can equal or even exceed the value of the ornament itself.
This is where the danger lies.
Families often repay only the interest because it feels affordable in the short term, but the principal remains untouched. When the loan term ends, they do not have enough to redeem the jewellery. So they renew the loan, or pledge another piece of gold, and the cycle begins. What was once a safety net becomes a slow drain of wealth.
The harsh truth is that lenders almost never lose in this business. RBI data shows that non-performing assets on gold loans are close to zero. That means if you fail to repay, the lender simply auctions your gold and recovers the money. For the borrower, however, the loss is permanent. Years of saving, family heirlooms, or wedding jewellery can disappear in a single auction notice.
This is why gold loans become undesirable: not because they start badly, but because they encourage repetition. The ease of pledging gold makes people return to it again and again, until there is nothing left to pledge.
When to Avoid and When to Consider
See, gold loans are not always reckless decisions. They exist for a reason: they unlock idle gold and provide quick liquidity in a country where credit is often hard to access. The problem begins when families treat them as routine borrowing instead of a last-resort tool.
When to Avoid
You should think twice about a gold loan if it is meant to cover expenses that will keep coming every month, such as school fees, groceries, rent, or household bills. Using gold for recurring needs guarantees that the loan will not be closed on time. The ornament remains pledged, interest keeps mounting, and soon another piece of gold is used. This is how the cycle begins.
It is also dangerous when the repayment source is uncertain. For instance, many small business owners pledge gold hoping that the next season’s sales will cover the loan. If sales fall short, they roll it over again, and by then they are paying more interest than they realise. Similarly, pledging gold to speculate in stocks, in trading, even in another business, is one of the riskiest moves. If the investment fails, the loss is not just cash, it is the family’s wealth and trust.
When to Consider (with extreme caution)
There are rare moments when a gold loan can be a lifeline. A sudden medical emergency where cash is needed within hours, and no other source is available, is one such case. The key difference is that the repayment source must be clear and near certain such as insurance reimbursement, a confirmed incoming payment, or salary due soon.
Short-term gaps are where gold loans can work. For example, if you need liquidity for a few weeks and have a fixed deposit maturing in a month, pledging gold might bridge that gap. But even here, discipline is crucial: the loan must be closed the moment the money arrives.
The Real Assessment
The right way to think about a gold loan is to ask: What will this loan create? If the answer is “nothing” – no asset, no durable value then it is only eroding wealth. A home loan leaves you with a house. An education loan leaves you with a degree. A gold loan leaves you only with the hope of getting your jewellery back, minus the interest you paid. That trade-off rarely makes sense unless the situation is exceptional and repayment is guaranteed.
Why This Conversation Matters
Gold loans are not just about individual choices. They reflect something deeper about how households manage money in India.
The rapid rise in gold loans tells us that many families are struggling with liquidity, that safer credit options are still out of reach, and that gold has become the easiest fallback.
NBFCs and fintech apps have made pledging ornaments look as simple as ordering food online. Push notifications highlight “quick cash in 30 minutes.” Agents come home to collect jewellery in sealed packets. For an ecosystem, this is efficiency. In practice, it lowers hesitation and normalises debt against the very asset families once kept untouched for emergencies.
The danger is that gold loans are expanding not because families are building wealth, but because they are under pressure. Instead of long-term savings or insurance, households are leaning on ornaments to plug financial gaps. This is silent wealth erosion on a large scale. Each pledge chips away at security built over generations.
That is why this discussion matters. It is not about saying no to every gold loan. It is about asking harder questions: Why do families need them so often? Why do lenders market them as if they are risk-free? And how many households will realise the true cost only when their jewellery is gone forever?
Until we face these questions, the cycle will continue with ornaments leaving lockers, moving into vaults, and then into auction lists. Families will keep thinking they have found a safe solution, until the safety net itself is lost.
Disclaimer
Note: This article relies on data from fund reports, index history, and public disclosures. We have used our own assumptions for analysis and illustrations.
The purpose of this article is to share insights, data points, and thought-provoking perspectives on investing. It is not investment advice. If you wish to act on any investment idea, you are strongly advised to consult a qualified advisor. This article is strictly for educational purposes. The views expressed are personal and do not reflect those of my current or past employers.
Parth Parikh has over a decade of experience in finance and research. He currently heads growth and content strategy at Finsire, where he works on investor education initiatives and products like Loan Against Mutual Funds (LAMF) and financial data solutions for banks and fintechs.
