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How Does Gold Loan Works?

Know how does gold loan works and its benefits. Learn about the eligibility, interest rates, and repayment process of gold loan in this comprehensive guide!

15 Feb,2024 11:06 IST 2187
How Does The Gold Loan Work?

Gold jewellery lying unutilized in a locker at home or in a bank is one of the most practical options to meet one’s immediate funding requirements. This jewellery can be pledged with banks and non-banking finance companies (NBFCs) to secure hassle-free loans and address the short-term liquidity problems.

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.

It all starts with your gold jewellery – necklaces, bangles, rings, anything goes (as long as it's at least 18 karat purity). Head to a trusted lender like a bank, jeweller, or NBFC (Non-Banking Financial Company). They'll assess the purity and weight of your gold using a special machine, determining the loan amount you're eligible for. But first, let’s get down to the basics.

What is a Gold Loan?

Think of a gold loan as a temporary exchange. You pledge your gold ornaments (hallmarked and in good condition) to a lender, typically a bank or financial institution, and receive a loan amount in return. Once you repay the loan with interest, you get your precious gold back!

Gold Loan Process

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 rate 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.

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.

Repayment Mode

Borrowers must repay the principal amount along with the interest over the loan term to get back the pledged gold articles.

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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.

Interest On Gold Loan

Secured loans typically have lower interest rates than unsecured loans. Being secured by nature, gold loans carry lower rates of interest as compared to unsecured loans because the gold used as a security reduces the risk of the lender. The lender holds on to the asset until the loan is fully cleared. In case of a default, the pledged gold can be auctioned to recover the losses.

There are several external factors that are in play to determine the price of the gold, thereby shaping the interest rate of a gold loan. Additionally, the interest rate offered by the lender also depends on the quantity and purity of the pledged gold, the applicant’s monthly income and credit score, loan amount and repayment tenure of the loan.

Gold loan interest rates also depend on the loan provider. Banks usually charge lower gold loan interest rates than NBFCs. Even within banks and financial institutions, the gold loan interest rates differ from lender to lender depending on the benchmark method they follow. There are two types of benchmarking methods – MCLR-linked lending rate (internal) and repo rate-linked lending rate (external).

Gold Loan: A Shining Solution for Different Needs

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.


Compare terms: Don't settle for the first offer. Compare interest rates, processing fees, and repayment options across different lenders before making a decision.

Read the fine print: Understand the loan agreement thoroughly, including any hidden charges or prepayment penalties.

Repay on time: Consistent repayments ensure you get your gold back smoothly and avoid additional charges.

Gold loans can be a valuable financial tool when used wisely. By understanding the process, considering your needs, and choosing the right lender, you can unlock the potential of your gold and navigate life's financial ups and downs with greater ease. So, shine on and make informed choices!


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.

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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.

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