Should you sell your gold or take a gold loan?

Gold is the best hedge against uncertainty and financial emergencies. People in India have a tradition of investing in gold. It is said that when you are in a financial emergency and all doors to arrange money are closed, you can liquidate your gold for immediate relief. But liquidating gold is not the only option anymore because you can also pledge the gold with the bank or the financial institutions to get a quick loan.

So, what’s the better way — to sell the gold in the market or take a gold loan? Let’s find out.

How does gold loan work?

Banks and NBFCs offer a loan facility against the gold deposit. On repayment of the loan amount, you can get your gold back from the bank. Usually, a gold loan is allowed against gold articles such as gold coins, biscuits and jewellery with 18K to 24K purity. Before accepting a pledge, the bank evaluates the quality of gold and accordingly determines the maximum loan you can get. Banks and NBFCs usually offer gold loans for a tenure of up to 3 years. Depending on the tenure of the loan and loan-to-value (LTV) ratio, the bank determines the interest rate on your gold loan. The processing time may vary from bank to bank, but you can get it within an hour in most cases. Most of the banks allow a gold loan up to 75% of its prevailing market value. So, if the value of the gold you are pledging with the bank is worth Rs 2 lakh, the bank will offer you a loan of up to Rs 1.5 lakh against it.

The bank may levy processing fees and gold appraiser fees. The processing fee ranges from around .5% to 1% of the loan amount. Some banks may levy pre-closure charges of around 1% of the outstanding loan amount. Also, processing charge is waived by some of the banks from time to time.

Also Read: Education Loan: Smart ways to pay off student loans quickly

It is important to note here that the bank requires you to consistently maintain the applicable LTV ratio if the market price of the gold falls. For example, you have taken a loan of Rs 1.5 lakh by depositing gold worth Rs 2 lakh at LTV of 75% when the market price of the gold was Rs 50000/10 grams. Later, the gold price in the market fell to Rs 40000/10 gram, i.e., the value of gold in pledge with the bank will fall to Rs 1.6 lakh. So, the bank would ask you to deposit an additional margin of Rs 40000 either by pledging more gold or additional payment to maintain the LTV of 75%.

How to sell gold in the market?

Selling gold in the market is an easier way to arrange money compared to pledging gold when you are in a financial emergency. You can resale gold to any jeweller or the jeweller from where you purchased a particular ornament.

The jeweller usually determines the purity of the gold you want to sell and ascertains the value based on their prevailing gold buying rate. It’s important to note here that normally there is a difference between a jeweller’s gold selling and buying rate, that difference is called spread. The jeweller’s selling price of gold is always higher than their buying rate. For example, a jeweller may sell you 10-gram 24K gold at Rs 60000 but when they buy the same quantity, they may offer you a rate of Rs 59800, thus charging a spread of Rs 800/10 gram.

When you buy gold jewellery, you need to pay making charges and taxes as well, but when selling it to the jeweller, you don’t receive it back and additionally, you have to bear the spread charged by the jeweller.

Adhil Shetty, CEO, Bankbazaar.com, says, “Physical gold is easy to buy, but not so easy to sell. You could still sell it for cash to certain jewellers at prevalent market prices. But finding such jewellers and going through the verification of the gold’s purity can be tedious. You may also need to preserve the gold’s invoice. Without it, retailers may refuse to buy the gold. In other cases, they may not give you cash, but give gold worth an equal value in exchange.”

What should you do?

If you expect the gold price to go up in the near future, you can get the gold loan because you don’t have to worry about maintaining the LTV with the bank, just concentrate on timely repayment of the loan. After the repayment, the value of your gold will be worth much more than what you had pledged with the bank. On the other hand, if you expect the gold price to go down, it’s better to sell it in the market because you can repurchase it at a lower rate in the future when your financial situation reinstates.

If you are not sure about the direction of the gold price, you can decide based on your repayment capacity. Also remember that selling gold in the market can result in a capital gain which is subject to capital gain taxes, thus reducing the amount you get in hand. If you are sure that you will be comfortable repaying the gold loan EMI on time, you can go ahead with it.