Gold Loan vs Gold Sale: Which Option is Better in a Financial Emergency? Miscellaneous

Gold in Indian homes is more than pieces of ornaments and financial investments. It is often marked with special moments like weddings, blessings from loved ones. Letting go of gold, when in need of money, can be stressful. Taking a gold loan brings some comfort, as there is hope of getting the jewellery back after repaying the loan. This article explains option of availing loan to unlock value of gold to tide off financial emergencies and compare it with outright sale. Read on…

Shikhar Sharma was devastated – his father needed urgent heart surgery, but money was tight. His family exhausted all their life savings on Shikhar’s engineering degree. Shikhar was getting handsome salary, but with a new job there were little savings. Some friends stepped forward to help, however, Shikhar’s pride pushed him to explore his own means. Then, his mother stepped in. A lifelong lover of gold jewellery, she brought out gold ornaments consisting of bangles, chains, earrings and other items, collected over decades. With moist eyes she said “For your father”. The gold, once a symbol of celebration, became their lifeline.

What is gold loan?

In simple words, a gold loan is a form of secured loan that is availed by pledging gold as collateral. Gold loans are generally taken for short term emergencies.

Payment methods – EMI and Bullet Payment

Loan provider may offer EMI plans and bullet payment plans. Bullet payment is special in the sense that there is no EMI as principal and interest accumulated are paid together at the end of life of loan. In case of bullet payment, the tenure of the loan cannot exceed 12 months, as per the RBI directions[1]. However, same can be renewed subject to the condition that accrued interest is paid before the renewal.

Avail loan or sell gold – what is best?

A common approach to tide off financial emergencies through gold assets is to avail loans. However, there can be situations when it is better to sell gold outright instead of taking a loan. A comparative is given below:

Aspect	Gold Loan	Gold Sale
Ownership	The ownership of the gold is retained only the physical possession is temporarily transferred.	The ownership is transferred. You will get money and gold cannot be recovered.
Interest	You need to pay interest which is a cost. Gold loan interest rates are ranging from 7.75% to 29% annually.[2]	There is no interest involved.
Gold price appreciation	Potential of gold price changes. Stand to gain in case gold price appreciates.	There is notional loss, in case of appreciation in the gold prices.
Other Cost	Processing Charges Appraisal Costs	No such costs. However, you lose difference between current “buy” and “sell” rate. You also do not get the amount paid to jewellers in form of making charges and wastage. Some dealers/ Jewellers may offer rates lower than the current buy rate.
Tenure	7 Days to 3 years	Not applicable. Money received is not to be returned.
Emotional values	Taking loan is emotionally easier.	Selling often involves emotional hardships.

Factors to consider and suggestive actions

Situation	Actions	Reason
Gold is part of family legacy or has emotional value	Take Loan	Avoid unnecessary emotional stress
You find current prices to be low and expect them to rise	Take Loan	Avoid regret later if prices go up. Generally, with inflation some rise is anyway expected
Cash requirement is temporary. You are comfortable paying back in couple of months	Take Loan	Loan helps meet short term need without losing Gold
Your credit history / CIBIL score is poor	Take Loan	Gold loans are collateral-based and lenders may offer loan even with low credit history
You need large amount of money and the loan amount is less	Sell	Selling releases full value, unlike loan that offers approximately 70% gold value
Gold item is of poor quality, has outdated designs or is damaged (old or broken pieces)	Sell	Better to sell and use money meaningfully. You may rebuild later
You do not have a clear plan to repay the gold loan	Sell	Avoids future interest burden and possible auction of your gold by lender
You do not have steady source of income.	Sell	Avoids future interest burden and possible auction of your gold by lender
Interest rates on gold loan is very high that would be difficult to service	Sell	Selling is safer than falling into debt trap
You are in debt trap or in really bad financial situation	Sell	Selling gold to pay off some of the debts to consolidate financial position
You already have multiple loans and EMIs	Sell	Selling avoids over-leverage and additional stress
You have idle gold coins that were bought for investment purposes	Sell	Sell-off and rebuild later.

How much gold loan can you get?

While gold loans usually offer only a proportion of the gold’s value, selling gold gives you the full market value excluding making charges or dealer margins. Reserve Bank has prescribed maximum loan that may be disbursed based on the value of gold. Based on the directions lenders may keep minimum margins of 15% for loans upto ₹2.5 lakh; 20 % for loans above ₹2.5 lakh but upto ₹5 lakh and 25% for loans above ₹5 lakh. In case of bullet loans interest that is to be collected at time of maturity is considered to be part of loan amount so the amount of loan reduces. Banks may decide their own margins subject to the maximum loan to gold value condition of RBI.

For example State Bank of India[3] has set following rates of margin.

Gold Loan (EMI based): 25%
3 Months Bullet Repayment Gold Loan: 30%
6 Months Bullet Repayment Gold Loan: 30%
12 Months Bullet Repayment Gold Loan: 35%

Endnote

Gold loans are a smart and safe way to unlock the value of your idle assets. Readers considering unlocking gold value need to appraise their situation to choose between loan or a total selloff. In situations of extreme financial distress, where urgent and larger sums of money are needed, selling gold can provide immediate and more cash than a gold loan. Gold loans are best suited for temporary cash crunches that can be easily managed. Shikhar may consider taking loan as he is getting good salary and protect the jewellery of his mother.

Love that is pure shines brightest, just like gold.

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