The Compounding Cost of Gold Loan Interest
Gold loan interest does not stop accruing while you defer repayment. Many borrowers take a 12-month gold loan thinking they will pay it off comfortably, then renew it at maturity without repaying the principal. After two or three renewals, the accrued interest can consume a substantial portion of the gold's value.
Consider a practical example: ₹1 lakh borrowed at 18% per annum for 36 months (through three renewals) accumulates approximately ₹54,000 in interest — and that assumes simple interest without compounding. With compounding, the figure is higher. After three years, you have paid ₹54,000+ in interest and still owe ₹1 lakh. Selling the pledged gold at the outset would have realised approximately ₹1.33 lakh (assuming 75% LTV means the gold was worth ₹1.33 lakh) — leaving you with ₹1.33 lakh rather than an ongoing interest burden.
LTV Ceiling and Margin Call Risk
The RBI's 75% LTV cap means you can borrow at most ₹75,000 against gold worth ₹1,00,000. If gold prices fall and your pledged gold is now worth only ₹85,000, your outstanding loan of ₹75,000 represents 88% LTV — exceeding the regulatory cap. The lender will issue a margin call, requiring you to either repay the excess (approximately ₹13,000) or pledge additional gold to bring the ratio back within limits.
This risk is most acute when gold prices are declining from a peak. A borrower who took a loan near the top of a gold price cycle may face margin calls when prices correct. Selling at or near the peak and keeping the full sale proceeds avoids this exposure entirely.
Breakeven calculation: Add up total interest paid to date plus projected interest for the remaining loan period. Compare this to: (current gold sale price) minus (outstanding loan balance). If the net proceeds from selling today exceed the interest you would save by repaying the loan, selling is the better financial decision.
Making the Decision
Selling to close a gold loan makes clear financial sense when: the total interest cost over the remaining loan period would exceed 5–7% of the gold's current value; the borrower has no realistic near-term source of income to repay the loan; or gold prices are near a local high and there is a reasonable risk they may fall, triggering a margin call.
Conversely, continuing the loan makes sense when: the remaining loan tenure is short (1–3 months) and the total remaining interest is modest; the purpose of the borrowed funds is generating a return higher than the loan interest rate; or the borrower has a near-certain cash inflow (bonus, land sale, etc.) that will enable repayment without selling the gold. The key is making a conscious, calculated decision rather than deferring indefinitely and letting interest accumulate.
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