Gold Loans in India Explained — How They Work, Rates and Risks

India holds an estimated 25,000 tonnes of gold in household vaults and bank lockers — more than any government reserve. When cash is needed urgently, this gold can be monetised within 30–60 minutes through a gold loan. It is one of the oldest, most accessible forms of credit in the country, available even to people with no CIBIL score.

How a Gold Loan Works

You walk into a lender's branch — Muthoot Finance, Manappuram Finance, SBI, HDFC, or IIFL — with your gold jewellery or coins. A trained assayer tests the purity using a carat meter and weighs the gold. The lender calculates the value of the net gold content (excluding stones and making charges) and offers you a loan against a percentage of that value.

RBI has set the maximum LTV (Loan to Value) for gold loans at 75%. This means on gold worth ₹1,00,000, the maximum loan is ₹75,000. Actual LTV offered depends on purity: 22-carat jewellery fetches a higher per-gram valuation than 18-carat.

Current Rates and Lender Comparison (FY 2025-26)

Bank rates (SBI, HDFC) are significantly lower than NBFC rates, but banks require KYC documents and may take a day longer. NBFCs are faster and more accessible for rural borrowers or those without strong documentation.

What Gold Is Eligible?

• Jewellery: 18-carat to 24-carat gold accepted by most lenders. Purity below 18 carat is typically rejected.
• Gold coins: RBI-minted or bank-issued gold coins up to 50 grams per customer are accepted by banks. Non-standard coins may be refused.
• Gold bars: Generally accepted only by specialised lenders.
• Not accepted: Gold ETFs, Sovereign Gold Bonds (SGBs), gold with precious stones that cannot be separated (stones are excluded from valuation anyway).

Repayment Structures

Gold loans offer unusual repayment flexibility:

1. Bullet repayment: Pay the entire principal plus interest at the end of the tenure. Popular for seasonal income earners — farmers, traders — who receive lump-sum payments at harvest or festival season.
2. Monthly interest only, principal at end: Pay interest monthly to avoid a large bullet, but principal is due at maturity.
3. Regular EMI: Equal monthly instalments of principal plus interest, like a standard loan.
4. Overdraft structure: Some lenders (Muthoot, IIFL) offer a revolving gold loan where you draw and repay like a current account — interest is charged only on the drawn amount.

What Happens If You Don't Repay?

This is the most critical section. Gold loans are non-recourse from a CIBIL perspective in one sense — since the gold is the collateral, lenders do not typically report defaults as aggressively as personal loan defaults. But:

• The lender will auction your gold after sending notice, typically 30–60 days after the due date.
• If the auction proceeds exceed the outstanding loan plus costs, the excess is returned to you. If there is a shortfall, you remain liable.
• Repeated gold loan defaults can still be reported to credit bureaus and affect your future borrowing.

Never take a gold loan for risky investments or to fund a lifestyle gap you cannot close. Use it for genuine short-term cash flow needs — a medical emergency, a business payment gap, a school fee.

Gold Loan vs Other Options

Tax and Documentation

Gold loans do not attract tax at the time of taking the loan — it is a debt, not income. If you accumulate gold jewellery from savings over years and then sell it after liquidating a gold loan, capital gains rules apply to the sale, not the loan itself.

Documentation needed is minimal: Aadhaar, PAN, a passport photograph, and the gold itself. This makes it genuinely accessible to the unbanked and those with thin credit files.

These figures are estimates for educational purposes. Consult a SEBI-registered advisor for personalised advice.