Disadvantages of Taking a Loan against Gold

For ages, Indians have been fascinated with gold, both for their ornamental value as well as their investment value. People have always treated the yellow metal as almost a liquid asset, which can be easily converted to cash for taking care of big expenditures like a wedding, education, etc., or even in times of medical emergencies or financial crisis. In such times, it is a good idea to sell your unused gold lying in bank lockers to support your need.

Why is This Relevant Today?

As we all know, the lockdown due to COVID-19 has shattered the economy completely. 82% of salaried and professionals are facing a salary and cash crunch. Even MSME business owners are feeling a severe shortage of working capital. Since most MSMEs are in the unorganized sector, banks and NBFC are unavailable for loans and credit. In such a situation, the best source which Indians have been using for a long time is gold.

So What Are The Options?

For generations, families accumulate yellow metal that proves to be the best companion during their difficult times. It happens because the value of gold has always gone up and when you sell it, it gives you a good return. 

Using gold to support your needs can be done in two ways- one, take the loan against your gold, secondly, you may sell off your unused gold lying in bank lockers. Experts believe that selling off your unused gold is any day a better option than taking a loan against it. 

Advantages of Selling Unused Gold over Gold Loan:

Taking a gold loan is nothing less than falling into a financial trap. There are various advantages of selling your unused gold over taking a loan against it. Let’s have a look at some of the reasons:

1) Convenience: The first benefit is that converting gold into cash is very easy. Step to a jeweler; he will check gold purity and give you instant cash. On the other hand, taking a loan against gold involves paperwork and documentation, which can be very tedious.

2) Higher Margin Ratio: If you approach a bank for a loan against your gold and its value is less than 75%, the maximum loan they offer is up to 75% value of your gold. The remaining 25% does not offer any value but goes to the bank as their margin (in case of non-payment). Hence, the actual interest on that loan ranges from 15-25%.

3) Never-ending Cycle: Due to a higher rate of interest, people end up paying a bigger amount month after month. It becomes a never-ending cycle, it takes years to get normal and the people are stuck for decades. It yields a total of 500-700% return to the lender on a minuscule loan amount.

4) A High Rate of Interest: Due to the terms and conditions of gold loans, which always favor the lender, sometimes the interest paid is itself 3-4 times the price of the loan thus the lender gets all the benefit and the value which is already lower given at the time of the loan. The borrower is never sure when this hefty interest will get over and when he will be able to repay the loan.

5) Loss of Your Gold: As per the agreement signed at the time of taking the loan, if the person is not able to pay; the bank has all the powers to liquidate your gold. In case, there is some problem and you fail to repay the loan or interest on time; the bank can exercise this power to recover their money. Many a time, customers face problems in paying the loan and they are forced to part with their precious jewellery which has a lot of emotions attached to it.

6) Suitable for Short Tenures Only: The gold loans are generally given for shorter tenures, not more than three years. And in case your loan requirement is for a longer duration than taking a gold loan is a big drawback for loan seekers.

Conclusion:

For ages, gold has been a preferred investment source that is both an asset and a friend to rely upon during emergencies. To make proper use of this gold; either take a gold loan or selling the unused gold lying in your locker. When it comes to comparing the two, the second option is always better. You do not get the full value for your gold but you are also saved from all the hassles related to taking a gold loan.