Easy access should not lead to overleveraging; beware that deferred repayment can increase interest burden
Gold loans typically come with lower interest rates because they are secured by collateral.
Listen to This Article
Gold loans by commercial banks rose from around ₹1.02 trillion in April 2024 to approximately ₹2.23 trillion in April 2025, a year-on-year growth of 119.6 per cent, according to the Reserve Bank of India (RBI). Prospective borrowers must understand the risks associated with these loans and carefully select their lender.
Why gold loans are booming
A key driver of this sharp growth is the rise in gold prices over the past few years. “It has increased the value of gold as collateral, allowing borrowers to access higher loan amounts,” says Raoul Kapoor, co-chief executive officer (CEO), Andromeda Sales and Distribution.
High consumption has spurred demand for credit. “Short-term consumption needs have gone up, fuelling demand for gold loans,” says Umesh Mohanan, executive director and CEO, Indel Money.
The RBI’s recent curbs on unsecured lending have tightened credit availability. “Gold loans have emerged as a viable and accessible alternative,” says Mohanan.
What makes them attractive
Gold loans typically come with lower interest rates because they are secured by collateral. “They are accessible even to those with limited or poor credit history,” says Kapoor.
These loans now include several other attractive features. “Traditionally, they were offered only as bullet loans. But now they come with flexible repayment options. Features such as pre-closure benefits and top-up facilities have further enhanced their appeal,” says Mohanan.
Swift disbursal makes them ideal for those in urgent financial need. “Once the gold is appraised and documentation is complete, the loan is typically disbursed within a few hours to a maximum of one or two working days,” says Kapoor.
Risk of overleveraging
Borrowers risk losing their pledged gold if they fail to repay. “Lenders are entitled to auction the asset to recover their dues,” says Kapoor.
Easy access to these loans may prompt some to borrow more than they can handle, risking a debt trap. Kapoor warns that deferred repayment options can lead to interest accumulation, leaving borrowers with a significantly higher repayment burden.
Impact of price volatility
The RBI caps the maximum loan-to-value (LTV) ratio at 75 per cent of the pledged gold’s market value. Fluctuations in gold prices can affect borrowers. “If the collateral’s value falls below the loan amount, borrowers must either pledge additional gold or pay the difference to maintain the LTV ratio,” says Mohanan.
Tips for picking the right lender
Begin by comparing lenders’ interest rates. “Rates start from 8–10 per cent and can go above 20 per cent, especially with non-banking financial companies (NBFCs),” says Amit Prakash Singh, co-founder and chief business officer, Urban Money.
Borrowers should also consider other factors. “These include the lender’s credibility, safety of pledged gold, LTV ratio, disbursal time, repayment flexibility, and hidden charges,” says Adhil Shetty, chief executive officer, Bankbazaar.com.
Singh suggests comparing processing fees, prepayment charges, and tenures. Shetty advises checking accessibility to the nearest branch.
Banks generally charge processing fees of 0.25–1 per cent, while NBFCs may charge slightly more. “Additional costs like documentation fees, renewal charges, auction fees, and penal interest for late payments add to the borrowing cost. Borrowers must calculate the effective annualised cost before finalising a lender,” says Shetty.
Banks typically offer tenures from 3 to 24 months, with some up to 36 months. “The RBI recently capped maximum tenure at 12 months for bullet repayments,” says Singh.
Repayment options include EMI-based, bullet repayment, and overdraft-style loans. “NBFCs and gold loan companies tend to provide more flexible repayment structures, including interest-only EMIs, and easy top-up facilities. However, they may be stricter with overdue accounts and can initiate auctions earlier than banks if repayment is delayed,” says Shetty.
Singh advises choosing a tenure and repayment method that align with income flow. Shetty recommends selecting a lender offering a grace period for repayment.
Are these loans right for you?
These are short-term loans. “They are less than ideal for long-term financial goals such as funding higher education or purchasing a home,” says Kapoor.
He adds that those with unstable incomes or uncertain repayment capacity should avoid pledging their gold.
Avoid these mistakes
Many borrowers fail to compare options or focus solely on interest rates. “They overlook other charges, repayment terms, and lender credibility. Many also neglect to read the fine print on auction timelines and penal charges,” says Shetty.
Some choose unsuitable tenures that don’t match their repayment capacity. Many are unaware of the gold verification process. “Regulations require lenders to weigh and test gold in the customer’s presence, issuing a signed certificate that clearly states weight, purity, and includes a photo of the jewellery,” says Singh.
Overleveraging is another pitfall. “Some borrowers take multiple gold loans simultaneously, increasing default risk,” says Shetty. Some fall prey to scams from unregulated players.
Borrow only what you need and set repayment alerts. Avoid repeatedly rolling over loans or using them for non-productive purposes.
aniltikotekar4sme.com 