How Gold Loans Work
A gold loan is a secured loan where you pledge your gold jewellery as collateral and receive a cash loan from a bank or NBFC (Non-Banking Financial Company). The Loan-to-Value (LTV) ratio — the amount you can borrow as a percentage of the gold's market value — is capped by RBI at 75% for NBFCs and banks. For 20 grams of 22-karat gold worth approximately ₹1,30,000, the maximum loan would be ₹97,500.
Gold loans in India typically carry interest rates between 9–24% per annum, depending on the lender and loan tenure. Banks offer lower rates (9–13%) but are slower to process; NBFCs like Muthoot Finance and Manappuram offer faster disbursement but at higher rates (18–24%). The gold is held by the lender until the loan and accrued interest are fully repaid.
The Real Cost of a Gold Loan
A gold loan at 18% per annum held for 12 months costs ₹18,000 in interest on every ₹1 lakh borrowed. If the loan is renewed or extended, the interest compounds — a ₹1 lakh loan at 18% for 24 months costs ₹36,000 in simple interest, or more with compound rates. Processing fees, valuation charges, and safe-keeping charges add another 1–2% annually.
The important question is: what are you doing with the borrowed money? If it is generating a return — invested in a business, repaid quickly after a cash flow gap — the interest cost is manageable. If it is covering ongoing household expenses with no concrete repayment plan, the loan becomes a debt trap that costs you more in interest than simply selling the gold would have.
Decision framework: If you need money for less than 6 months and have a clear repayment source (incoming salary, receivables, seasonal income), a gold loan is likely cheaper than selling. If the need is for more than 12 months with no clear repayment plan, selling is almost always more financially rational — you keep the full gold value and eliminate the interest burden.
Risks of Not Repaying a Gold Loan
If a gold loan is not repaid by the due date and no renewal is arranged, the lender has the legal right to sell your pledged gold at auction to recover the outstanding amount. This means you lose the gold and any equity above the loan amount may be limited in recovery depending on the auction price. Lenders are required to notify borrowers before auctioning, but the notice period can be as short as 15–30 days.
The risk is real: if gold prices have fallen since you took the loan, the auction proceeds may not fully cover the outstanding balance, leaving you with both no gold and a residual debt. Selling your gold outright avoids this scenario entirely — you receive the current market value and owe nothing to anyone.
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