Gold has long been a trusted asset in Indian households, not just as jewellery but also as a financial backup during tough times. When faced with a cash crunch, many people prefer gold loans over other borrowing options because they are easier to obtain. In 2024, more people relied on secured loans like gold and home loans for financial needs. The BankBazaar Moneymood 2025 survey confirmed this trend, showing an 18% rise in home loans and a remarkable 56% surge in gold loans.
Gold loans are easier to get than personal loans since they require minimal paperwork and no credit check. Backed by gold, they come with lower interest rates and quick approvals, making them ideal for urgent needs like medical bills or education. Gold’s value adds security, but price fluctuations can impact loan amounts, repayment terms, and even the risk of losing pledged gold. This article explores how rising gold prices affect gold loans.
What determines gold prices?
Gold is often seen as a shield against inflation and a reliable investment during economic or political uncertainty. When inflation rises or the economy faces a slowdown, people turn to gold for security, driving up its demand and price. If the demand is high but supply is insufficient, gold prices may rise.
Geopolitical changes like conflicts and wars also influence gold prices. When interest rates rise, gold prices often drop since investors prefer interest-earning assets over gold, which doesn’t generate returns. Alternatively, when rates fall, gold becomes more attractive, pushing its price higher. Moreover, gold is priced in US dollars and its value moves with the currency. A weaker dollar makes gold cheaper for international buyers, increasing demand and raising prices, while a stronger dollar has the opposite effect.
Impact of gold prices on gold loan value
For gold loans, loan-to-value (LTV) is the ratio sanctioned loan amount to the market value of the pledged gold. The loan amount you receive will depend on the gold’s market value and the lender’s maximum LTV ratio. RBI regulations dictate that banks and NBFCs in India can offer gold loans with an LTV of up to 75%, meaning borrowers can get up to 75% of their gold’s value as a loan.
How fluctuating gold prices can impact your gold loan
Gold loans are closely linked to gold prices and are highly sensitive to market fluctuations. When prices rise, borrowers can access higher loan amounts, but if prices fall, loan eligibility reduces. A decline in gold prices can create challenges for existing gold loan borrowers, as lenders may require them to pledge more gold or make partial repayments to cover the shortfall. This happens because when a drop in gold prices increases the LTV ratio, potentially exceeding the allowed limit. To restore balance, lenders may request additional payment or collateral.
That said, lenders usually decide loan eligibility based on the monthly average gold price, leaving some margins to absorb minor fluctuations. But, if gold prices drop sharply, they may ask for extra collateral or partial repayment, causing greater financial strain for the borrower.
Things to keep in mind when taking a gold loan
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Since lenders can offer up to 75% of your collateral as a loan, compare offers across banks and NBFCs for the best deal. Gold loans can be cheaper than personal loans, but rates and associated charges (processing fees, foreclosure charges, etc.) can vary across lenders. Check the repayment options being offered as well and choose what fits you financially. Go in with the assumption that you may be requested for additional collateral or repayments in case prices rise. Lastly, the lender can auction your gold to recover their dues if you default on repayments. So always repay on time to protect your assets.
Adhil Shetty is the CEO of BankBazaar.com
