Gold Loan: How to Apply and Strategies to Avail Gold Loan

18 Jul 2024|

2 min read |

by ICICI Securities Team

What is a gold loan?

The first thing we will understand is what is gold loan? A gold loan is a secured loan where you borrow money from a lender (bank or NBFC), by using your gold jewelry or ornaments as collateral. Unlike unsecured loans like personal loans, a gold loan uses your gold as security. In other words, for any reason, if you fail to repay the loan, the lender can sell your pledged gold to recover the debt.

What factors to consider before applying for a gold loan?

Here are a few things you need to evaluate before taking a gold loan:

Loan Purpose: Have a clear answer as to whether you are borrowing for a short-term need or a long-term investment?
Your Financial Situation: Can you comfortably manage higher monthly payments with a short-term loan?
Expected Interest Rate Movement: Do you anticipate interest rates to rise?

What is gold loan tenure?

It refers to the period for which you can use the gold loan amount before making the payment. It is a crucial aspect to consider while taking a gold loan. The maximum tenure offered for which you can get the gold loan is 24 months for a long-term gold loan and 6 months for a short-term gold. There are different options to pay the gold loan:

Equal monthly installments (EMIs)
Bullet payments
Flexible repayment schemes tailored to your income sources

Let us understand with an example. You opt for a 12-month gold loan tenure as you borrowed Rs 1 lakh at an interest rate of 10%. In this case, if you opt for EMI, you must pay approximately Rs 8333 as EMI. After one year, the total you would have paid is Rs 1.1 lakh, which includes an interest of Rs 10,000.

Short Term vs Long Term Gold Loan Tenure

Let us understand different parameters and how they change as your loan tenure changes. Here is the comparison:

Parameter	Short Term Tenure	Long Term Tenure
Time	The tenure in only a few months	Extends beyond a year
Purpose	Ideal for immediate financial needs or short-term expenses	Suitable for larger financial requirements or long-term projects
Monthly Payments	Your monthly payment is higher as the loan tenure is shorter	It is lower as your payment spreads over a longer period
Total Interest Paid	Less compared to long-term loan	Maybe higher due to the extended duration
Flexibility	Offers quick repayment and flexibility	Provides a lower monthly burden but may result in higher interest paid

Can loan tenure be changed?

Yes, most gold loan providers give you the option to increase or reduce your loan tenure. This feature can be useful for you if there is an unexpected financial setup. It may force you to ease your monthly repayment burden. If the option is not available, you have two other options to change loan tenure:

Refinance your loan: It refers to restructuring your entire existing gold loan with a new lender with increased tenure.
Balance transfer: It refers to simply transferring the outstanding balance of your existing gold loan to a new lender.

Conclusion

Generally, the short-term gold loan may offer a higher loan amount per gram due to the lower interest rate. However, a long-term loan might be preferable if your budget can't handle the higher monthly payments of a short-term loan. The best thing to do would be to compare interest rates and terms offered by different lenders before finalizing your gold loan. You can potentially get a better deal on the loan amount per gram by shopping around.

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