Short on cash, rich in gold? Here’s how a gold loan can put more money in your pocket

The sharp rise in gold prices over the past few months may have made buying the yellow metal a tall order for average consumers. But the spike in prices has enabled borrowers to raise more money by using gold as a collateral. The loan-to-value (LTV) for gold has increased by nearly 20% in the last one year. Gold LTV, which was hovering around ₹4170 per gram during the last week of May, has zoomed to about ₹5000 per gram now, data with the Association of Gold Loan Companies (AGLOC) India showed.

Simply put, a sovereign of 22-carat gold (8 grams) would get you a loan amount of about ₹40000 now compared to around ₹33300 a year ago. AGLOC represents leading gold loan NBFCs (non-banking finance companies) such as Muthoot Finance and Manappuram Finance.

Banks and NBFCs offer loans for up to 75% of the prevailing value of gold, which is referred to as LTV. The rate of interest and the methodology followed in calculating the eligible amount for the loan differs among banks.

Domestic gold prices increased about 15% during fiscal 2024 and touched ₹67000 per 10 grams at the end of March 2024. The yellow metal moved up to about ₹73000 during April as it retained its shine as it was seen as one of the safer investment options by various central banks across the world and consumers amid geopolitical uncertainties. Growth for gold loan NBFCs, which account for about 60% of the market, has also seen a sharp uptick due to the spurt in the prices of the precious metal.

Muthoot Finance, the gold loan NBFC, reported the highest ever gold loan advances in the first nine months of a year in fiscal 2024 at ₹120856 crore and the highest ever disbursals to new customers at ₹11920 crore for the timeframe.

Gold loan AUM (assets under management) grew 7.3% year-on-year to ₹83700 crore in fiscal 2024 for Manappuram Finance. “Share of gold loans in the AUM will improve. Judging from the current trends, the gold loan growth will be better than last year,” analysts at Motilal Oswal Securities said.

Private sector banks charge a higher interest rate on gold loans compared to their public sector peers. NBFCs usually offer gold loans at a rate that is higher than banks. Gold loan NBFCs typically charge 12% interest per year from borrowers.

While SBI charges an effective interest rate of 8.75%-9.9% per year on personal gold loans, the interest rate at HDFC Bank and ICICI Bank works out to 9%-17.6% and 9%-18% respectively. Incidentally, banks do not insist on ‘income proof’ for availing such loans.

The borrower, however, must have an account with the bank to get the disbursement. There is no such requirement for availing gold loans, which is the easiest funding source to tap during emergencies, from NBFCs.

Banks offer several options for gold loans including paying just the interest every month and settling the principal amount at the end of the tenure, a regular EMI (equated monthly instalment) option that works like a home loan where both interest and principal payouts are deducted. They also allow partial payments of both interest and principal. The bullet payment option allows the borrower to settle the interest and principal at the end of the loan tenure.

The processing and documentation charges, however, are not uniform and several private banks charge more than government-owned banks for the same. While some banks levy gold appraiser charges separately, which has to be paid by the applicant, others do not collect such fees. The gold appraiser’s assessment would determine the loan amount—better quality gold would fetch more money and vice versa.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.