Things to Know Before Taking a Gold Loan

Indians have been traditionally investing in Gold but such investments have been more due to the emotional and social reasons than financial ones. Gold Jewellery makes a few guest appearances and later finds its place mostly in the bank lockers. Apart from letting you brag your gold collections at a family functions, gold jewellery now has another use for you – you can take a Gold Loan.

What is a Gold Loan?

A Gold Loan is a loan given by banks and NBFCs against the security of your gold ornaments and jewellery. It must also be noted that the gold loan is available only against the security of gold jewellery and not against bullion/primary gold including gold ETFs/ mutual funds. The loan is granted on the basis of market value of the gold and is further guided by the guidelines issued by the Reserve Bank of India (RBI).

RBI Guidelines in respect of Gold Loans

RBI has put in place several safeguards for loans against gold ornaments and jewellery, the primary one being in respect of Loan-To-Value (LTV) Ratio. Loans (including bullet repayment loans) against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 percent of the value of gold ornaments and jewellery. So, you can avail a loan of Rs. 75 for your gold jewellery valued at Rs. 100. LTV ensures that the banks have sufficient cushion against the fall in the value of the security. As such, even in case, the market value of gold ornaments fall by 25%, bank’s exposure to the gold loan remains fully secured.

Further, RBI stipulates that LTV of 75 percent has to be maintained throughout the tenure of such loan and not just at the time of loan sanction. The exposure considered for ensuring 75% LTV must also include the accrued interest so outstanding. Also, in case the principal and interest are repayable at the end of the loan tenor, the loan cannot be sanctioned for more than 12 months.

Benefits of Gold Loans

gold loan

Gold loans carry several benefits for the borrowers, as listed below:

  1. The utilisation of Investment blocked in Gold Jewellery – Gold loan lets you avail the financial value lying locked in gold jewellery. It may not be possible for you emotionally to part with certain jewellery but you can always avail a loan against this jewellery, as you will get the jewellery back upon repayment of the loan.
  2. Faster Processing of Loans – RBI has standardized the gold valuation by benchmarking it to the average of last 30 days as quoted by the India Bullion and Jewellers Association Ltd. or the historical spot gold price data publicly disseminated by a commodity exchange in a consistent manner as per their Board approved policy. As such, the loan eligibility and processing happens at much faster pace than other loans.
  3. Available even in Absence of Credit History – Considering the availability of sufficient security which is relatively liquid as well, banks do not generally care if the borrower has a bad credit history, as banks always have the sufficient security cover to fall back upon. Therefore, any person with a low credit score and requiring funds on an urgent basis can avail a gold loan.
  4. Flexible Repayment Options – Since gold loans are allowed for miscellaneous purposes, the repayment can be set to be flexible ranging from monthly payment option or bullet repayment at the end of the loan term, as the cash outflows are not required to be matched with the cash inflows.

Risks in availing a Gold Loan

gold loan

Just like a coin has two sides, availing a gold loan comes with its own risks. The primary risk is the volatility in the value of underlying security i.e. your gold jewellery. As RBI has directed the banks to maintain the LTV ratio of 75% at all times, any decrease in the gold price may push the trigger button for the banks to sell off the jewellery and get the gold loan repaid instead. However, such a situation can be avoided by the borrower by repaying the proportionate amount to the bank.

So, next time you may need a gold loan, you can check out this option as it’s convenient and faster choice. Hope our article outlined the things to know before taking a gold loan to enable you to make an informed decision.

Simardeep Singh


Simardeep Singh is a Chartered Accountant based in Delhi. He loves sharing his knowledge about personal finance and investment.