What Are The Advantages And Disadvantages Of A Gold Loan?

In this age of financial technology advancement, accessing credit has become much easier and more organized. There are multiple ways to procure a loan. One of the ways to get a loan that has been in vogue for a very long time is a gold loan. People have been availing loans by pledging their gold jewellery and items, but now the process has become easier and digital.

A gold loan is when the borrower pledges their gold items to the lender, and the lender, after verifying the purity, gives a loan based on the value of the items pledged. There are different eligibility criteria that differ from lender to lender, but this is the basic idea. If you are planning to take a gold loan, you should know about its following merits and demerits. 

Advantages:

  1. Easy Approval- Gold loans are secured loans and thus, their eligibility requirements are fairly relaxed. The documentation required for it is also minimal and the approval process is quick.
  2. Quick Fund Disbursal- Since the approval is easy and quick, the funds are also disbursed quickly. If you take the best gold loan available on the market, you could even get your funds within a few hours or minutes if it is digital. 
  3. No Credit Score- Your credit score might be checked to verify your credit worthiness if you take other loan routes. When it comes to gold loans, you may not have to show a high credit score.
  4. Digital Option- There is now a rise in digital gold loans as well. One can hold gold digitally through blockchain technology and avail the same or similar loan benefits. 

Disadvantages:

  1. Loss of Gold- If you default on your loan payments, your lender has the right to confiscate your gold and auction it. They do it to get the outstanding balance amount from you. If you don’t want your assets to be frozen or taken away, you should pay your gold loan EMIs on time.
  2. Loan-to-Gold Ratio- Whether it is a physical gold or a digital gold loan, the loan amount you get will usually not exceed more than 80% of the market value of your gold. The loan-to-gold ratio differs between different lenders, but that percentage decides your loan amount. If your gold is valued at Rs. 1 Lakh, you might be able to get a loan of up to Rs. 80,000. 
  3. Financial Stress- A gold loan can be burdensome because the timely instalments are important and there is a chance of losing your gold if you default. Gold jewellery usually has an emotional attachment in Indian households and pledging them for loan can be considered as a risk. 

Now that you have gone through the advantages and disadvantages of getting a gold loan, you can be better prepared for it. No matter which type of gold loan you take, make sure that you read all the terms and conditions carefully before applying for it and check the interest rates carefully. If you are taking a gold loan through a digital gold loan app, make sure that you verify the lender’s credibility.