Top Reasons Why Parents Opt Gold Loans To Fund Children College Studies

Gold has always been a coveted item in Indian households. Giving of gold in the form of jewellery, biscuits or coins during auspicious occasions – births, engagements, weddings – as gifts is a common norm among family members and close relatives. In addition, many Indian families invest in gold as they see it as a relatively safe and stable investment with high returns. Thus, almost every Indian household, especially in urban areas, have some amount of gold as part of their household assets.

What however is a relatively new phenomenon is that an increasing number of parents have begun to turn to gold loans in order to finance their children’s higher education in recent years. A gold loan is a loan given by a bank or Non-Banking Financial Company (NBFC) to an individual who deposits gold as a collateral. The loan amount given is dependent on the weight of gold deposited and its purity. It is also dependent on the prevailing price of gold in the market and the Gold LTV ratio set by the lender.

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There are several reasons why a gold loan in India has become a preferred means of financing a child’s higher education. Perhaps the main reason behind this preference is the relatively easier procedure involved in getting the loan sanctioned. The procedure for obtaining a sanction for an education loan is far more tedious and long drawn in comparison. There are a number of documents that the student needs to submit – proof of admission, marksheets of Class X, XII and graduation if applicable, and the schedule of fees. The co-applicant or guarantor also requires to submit documents regarding income. If she or he (the co-guarantor) is salaried, then the latest salary slip, or the latest IT returns often needs to be submitted. If the amount of loan needed is more than INR7.5 lakhs, some lenders also require the guarantor to submit an asset-liability statement.

Another reason why instant gold loans are preferred is because many lenders provide educational loans without collateral only for admissions into the better-known, established institutes of higher education. Getting an educational loan to support the tuition fees and other expenses in lesser-known colleges is far more difficult. Thus, many parents whose children have got admission into colleges not on the list of accredited colleges of the lender, prefer to apply for a gold loan directly, instead of going through the rigorous paperwork and lengthy procedure associated with educational loans. In addition, many lenders provide loans without any collateral to reputed institutions only if the loan amount is within four Lakhs. Loans between four lakhs to seven and a half lakhs often require a third-party guarantor. Most lenders will demand a collateral if the loan amount crosses this amount of INR 7.5 lakhs.

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Gold prices have been increasing in a fairly steady manner in recent years and even breached the INR 60,000/- mark for 10 grams gold in June 2023. In the year 2000, the price for the same quantity of gold was under INR 4500/-. Thus, the gold received as wedding gifts by parents in the early 2000s will have increased in value by more than 12 times in the interim. This makes gold loans an attractive option for parents to put down as a collateral against an instant gold loan in India which can be used for educational related expenses of their children.

The low gold loan interest rate is comparable with the interest rate of educational loans – another factor influencing parents’ decision to opt for a gold loan to finance their children’s education. In fact, since gold loans are secured loans, the interest rate offered by many lenders on gold loans is lower than the interest rate offered on educational loans. While the repayment tenure of educational loans is usually five to seven years which is sometimes extendable, and far more relaxed compared to the repayment tenure of gold loans, parents and guardians are encouraged by the low interest rates and other attractive features of the gold loans. Thus, even though the repayment tenure of gold loans usually extends to a maximum of 24 months, parents and guardians look at gold loans as a preferred option.

Another reason why several parents opt for gold loans over educational loans is because the gold loan maximum limit offered by some banks and NBFCs is as much as INR 5 crores. Educational loans typically have a maximum limit of INR 10 Lakhs to INR 15 Lakhs for studies in Indian educational institutes and double that for studies overseas. This is often a constraint for financing education in some institutes.

To conclude, there are several reasons why gold loans are proving to be a more attractive option than educational loans when financing higher education. Those in need of loan support would benefit from weighing the pros and cons of both options before finalising what suits them best.