Gold loan: How it works and what borrowers must know

In a country like India that has a rich cultural heritage; where gold has intrinsic financial value and sentimental value, a gold loan gives you the ability to leverage the value of your jewellery without selling it. The loan can also be a quick and flexible funding option, for a range of needs, such as business, weddings, education, and medical situations.

Let's take a look at the key features of a gold loan in India, and what recent RBI directives a borrower should be aware of.

What is a gold loan?

A gold loan is a type of secured loan by banks or a non-banking financial company, when it is secured against a bar of gold, coins, or jewellery in exchange for the loan. Loan to value is the percentage of the gold's market price used to qualify a loan amount, and the borrower gets the gold back when both principal and interest are paid off.

How does a gold loan work?

• Loan application: You take your gold to a NBFC or bank; the lender considers the weight and purity of the gold.
• Assessment and valuation of gold: The lender uses the current market rate to assess and value the gold. The NBFC or bank will only accept gold that is 18 to 24 carat.
• Loan amount disbursement: The lender will disburse the loan amount, generally at the time of application based on the LTV ratio that in general is up to 75% of the gold value.
• Loan payment options: The borrower can choose from bullet repayment options, EMIs, or simply pay the principal at the end of the loan term and the interest over the loan term.
• Return of your gold: Once the loan has been repaid in full, your gold would be returned in the same condition as when deposited.

Why are gold loans popular in India?

1. Fast disbursement, very often in under 10 minutes.
2. Gold is the collateral, so no proof of income.
3. Flexible term, typically, between three and thirty-six months.
4. Lower interest rates compared to unsecured loans.
5. Credit score is not affected unless there is a default.

RBI rules on gold loans: What borrower should know?

In April 2025, the Reserve Bank of India (RBI) released draft rules to promote more transparency and better protect borrowers in the gold loan sector.

• Strict vaulting procedures: Banks must ensure that pledged gold is stored in vaults or lockers under RBI-certified institutions or organisations.
• Regular audit and valuation standards: It may be worthwhile to require conformity in the valuation of gold and regular third party audits.
• Digital consent: Borrowers should digitally consent to the application purpose to give them adequate time to understand borrowing.
• Capping loan term: To minimise rollover risk, the RBI can place caps on loan terms.
• Capping loan limit in cash: Any loan in cash terms (above ₹20,000) must be disbursed through banks.
• Disclosure requirements: Lenders must disclose interest rates, terms of auctions and service fees in simple terms to borrowers.
• Auction control: Auctions (in case of default) should follow fair and transparent processes.
• Insurance of gold: It may be normal and prudent for lenders to purchase insurance to cover pledged gold from losing ownership or theft.
• LTV ratio cap: The cap on LTV ratio at 75% must be followed; to prevent over-leverage.

Is a gold loan right for you?

Gold loans are ideal for people who want fast liquidity without the hassles of a lot of paperwork and approvals. However, borrowers should act with caution:

1. Compare interest rates and fees.
2. Understand how repayment will work.
3. Have a plan for how you'll utilise your gold.

In conclusion, yes, gold loans are quick, easy and often cheaper than a personal loan, however they still come at a cost. The RBI's new regime will provide a greater measure of safety and uniformity; with this, standard borrowers will have greater access to these loans.

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