How Does a Gold Loan Work?
Indeed, gold loan are among the most popular credit products in India thanks to the ease of borrowing. Another major reason for their popularity is that, unlike other secured loans such as a home loan or a vehicle loan, proceeds from the gold loan can be used for any personal or even business purpose.
Life throws unexpected curveballs, and sometimes, we need a financial boost. That's where gold loans come in – a quick and convenient way to access cash using your gold jewellery as collateral. But how exactly does it work? Let's delve into the world of gold loans and empower you to make informed decisions.
What is a Gold Loan?
A gold loan is a secured loan where you pledge your gold jewellery, coins, or bars as collateral to borrow money from a bank or financial institution. The lender holds your gold until the loan is repaid. This type of loan helps individuals to access quick funds for emergencies, business needs, or personal expenses without the need to sell their gold. The process involves gold valuation, setting a loan amount based on the LTV ratio, and flexible repayment options.
Read More: What is Gold Loan
How Does a Gold Loan Work in India?
Like any other secured loan, in a gold loan the borrower pledges their gold jewellery as a collateral with the lender. An important thing that every gold loan applicant must be aware of is that mostly lenders accept gold jewellery with purity of at least 18 karat. Moreover, as per the Reserve Bank of India’s norms, banks and NBFCs offer only up to 75% of the gold’s value as a loan in order to manage their risks.
The lenders conduct an evaluation process to check purity and establish the weight of the gold. Lenders analyse both the quality and quantity of the gold to determine its value based on the current gold rate market price .
Once the evaluation process to sanction the loan amount based on the market value of the gold is done, the lenders verify documentation. Compared to other loan products, minimal gold loan documentation (like identity proof and address proof) and do not involve any heavy paperwork. The loan is quickly disbursed after completing the evaluation and verification process.
Valuation: Your gold's purity, weight, and current market value determine the loan amount. The lender appraises your gold using a Karatmeter, and voila, you know how much you can borrow.
Documentation: Basic KYC documents like ID proof and address proof are required. Some lenders may ask for additional documents depending on the loan amount.
Loan Agreement: This document outlines the loan terms, including the interest rate, loan tenure, repayment schedule, and late payment charges. Read it carefully before signing!
Fund Disbursement: Once everything is in order, the loan amount is credited to your bank account or handed over in cash.
Repayment: Choose a repayment plan that suits your budget. Most lenders offer flexible options like monthly installments or bullet payments. Remember, timely repayment ensures you get your gold back smoothly.
Gold Loan Interest Rates:
Gold loan interest rates are generally lower than personal loans due to the secured nature of the loan. However, rates can vary depending on factors like the loan amount, tenure, your creditworthiness, and the lender's policies. At IIFL Finance, the interest rates on a gold loan are very competitive and they range anywhere from 11.88% to 27% p.a.
Gold Loan Calculator:
Feeling overwhelmed by numbers? Breathe easy! Many lenders offer online gold loan calculator. Simply enter your gold weight and purity, and the calculator estimates the loan amount you can expect, along with the interest payable. This helps you make informed decisions and compare different lenders before choosing one.Gold Loan Tenure
Gold loans have a short repayment tenure because volatility in gold prices can have a negative impact on loans. A majority of gold loans have repayment periods ranging from three to 12 months. To minimise losses caused by any change in the price of gold, most lenders offer gold loans starting from one month to a maximum of three years.
The maximum tenure is different with every lending organization but it never goes beyond five years. It is up to the borrowers to choose the repayment tenure judiciously depending on their financial obligations and repayment ability.
Gold Loan Repayment Modes
Borrowers must repay the principal amount along with the interest over the loan term to get back the pledged gold articles.
Gold loan repayment terms and conditions vary from one lender to another. Borrowers can either pay the interest amount upfront and the principal amount at the end of the tenure or can even choose to pay off the loan through equated monthly installments like any other loan where interest and the principal are paid together.
Uses of Gold Loan
Quick Cash for Emergencies: Need urgent funds for medical bills, home repairs, or unexpected expenses? A gold loan can provide immediate financial assistance without lengthy approvals or complex paperwork.
Consolidate Debts: Juggling multiple high-interest loans? A gold loan with a lower interest rate can help you consolidate your debts and simplify your repayments.
Business Opportunities: Entrepreneurs can leverage a gold loan to invest in their business ventures, tapping into their existing assets without selling them.
Festival Funding: Gold loans come in handy during festive seasons when expenses spike. Meet your celebration needs and manage cash flow wisely.
Gold Loan Eligibility Criteria
To avail of a gold loan from IIFL Finance, the applicant must:
- Be an Indian citizen aged between 18 and 70 years
- Own gold jewellery of 18 to 22 carat purity.
- Possess a valid KYC document such as Aadhaar, PAN, passport, or voter ID
No income proof is required, making it ideal for both salaried and self-employed individuals. The loan amount is determined based on the current market value of gold, with up to 75% loan-to-value (LTV) offered. The process is quick, transparent, and requires minimal documentation.
How to Calculate the Loan Amount
At IIFL Finance, the loan amount for a gold loan is calculated based on the purity and net weight of your gold jewellery, typically ranging between 18 to 22 carats. We determine the value of your gold using the prevailing market rates, and offer up to 75% of that value as the loan amount, as per the RBI’s Loan-to-Value (LTV) guidelines.
For example, if the assessed gold value is ₹1,00,000, you may be eligible for a loan of up to ₹75,000. The actual amount may vary depending on factors such as gold quality, current prices, and the selected loan scheme. At IIFL Finance, we ensure a transparent, secure, and quick process, helping you unlock the true potential of your gold with minimal documentation and maximum convenience.
Conclusion
A gold loan, backed by gold jewellery, can be an instant solution to get a secured credit facility. Gold loans have much lower interest rates and can be an ideal alternative to personal loans and credit cards.
The amount of money a person is eligible to borrow against the gold and the interest offered depends on the lender. As such it is good to compare the interest rates of at least two to three lending institutions and then choose the lender offering the best deal.
IIFL Finance offers instant funds against your physical gold to meet your emergency financial requirement. Gold loans at IIFL Finance are offered through a quick and fully online application gold loan process that can be completed within minutes while sitting at home. IIFL Finance offers gold loans at affordable interest rates and gold loan repayment tenure that can even be customized depending upon the borrower’s income or cash flows.
Frequently Asked Questions
Yes, a gold loan can be beneficial due to lower interest rates, quick disbursal, and no income proof requirement. It’s ideal for short-term financial needs without selling assets or impacting long-term financial goals.
Gold loans can be repaid through monthly EMIs, bullet repayments (lump sum at tenure end), or interest-only payments with principal at maturity, depending on the lender’s repayment options.
A gold loan is better for quick, short-term funding as it requires minimal documentation and offers lower interest rates. Personal loans are suitable for higher amounts or long-term needs but involve stricter eligibility and longer processing.
No, a gold loan is not taxable since it is not considered income. However, if the pledged gold is sold due to default, capital gains tax may apply depending on ownership and value appreciation.
To benefit, pledge high-purity gold, compare interest rates, choose flexible repayment terms, and borrow only what is needed. Timely repayments also help maintain credit health and unlock future borrowing opportunities.
NBFCs like IIFL Finance and banks offer competitive gold loan amounts. The maximum loan depends on the gold’s value and the lender’s Loan-to-Value (LTV) policy, typically up to 75% of the current gold market value.
Gold loans are cheaper because they are secured loans backed by physical gold. This lowers the lender’s risk, allowing them to offer reduced interest rates compared to unsecured loans like personal loans.
To take a gold loan, you need to visit a bank or NBFC with your gold jewellery or coins. The lender evaluates the gold’s purity and weight, then offers a loan amount based on the valuation. After completing documentation, the approved loan is disbursed quickly, often on the same day.
Gold is valued based on its purity (measured in karats) and current market price. Lenders usually accept gold of 18–24 karats and deduct making charges or stones before valuation. The loan amount is then calculated as a percentage of the gold’s value, known as the Loan-to-Value (LTV) ratio.
If you fail to repay a gold loan on time, lenders may charge penalties or increase the interest cost. After repeated non-payment, they have the legal right to auction your pledged gold to recover the outstanding amount. However, you are usually informed before such action is taken.
Yes, many banks and NBFCs provide gold loans against gold coins and bars, subject to certain conditions. Generally, lenders only accept bank-issued coins up to 50 grams per borrower. Pure gold bars may also be accepted, but policies vary across institutions. IIFL Finance does not give loans on gold coins and gold bars.
Basic KYC documents like Aadhaar card, PAN card, voter ID, or passport are required for a gold loan. Some lenders may also ask for address proof or photographs. Income proof is usually not mandatory since the loan is secured against gold.
Yes, most lenders allow you to renew your gold loan by paying accrued interest and continuing the loan term. You can also foreclose it anytime by repaying the principal and interest in full, usually without additional charges.
Gold valuation is based on purity (karats), weight, and prevailing market rates. Lenders use certified methods to ensure accuracy, but decorative elements like stones or studs are excluded from the calculation.
The maximum loan amount depends on the gold’s value and the lender’s Loan-to-Value (LTV) ratio, which is usually capped at 75% of the gold’s market value, as per RBI guidelines.
Defaulting on a gold loan may result in penalties and higher interest charges. If repayment remains pending, the lender has the right to auction your pledged gold to recover dues.
Disclaimer:The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.
