The True Cost of a Gold Loan
The headline interest rate is only the starting point. The total cost of a gold loan can be significantly higher once you account for various other charges. Many lenders apply processing fees, which can range from 0.5% to 2% of the loan amount. For a loan of ₹2
lakh, this could mean an additional ₹4,000 upfront. You will also encounter valuation or appraisal fees, which are charges for assessing the purity and weight of your gold, typically costing between ₹200 and ₹500. Some financial institutions may also levy documentation or administrative charges. When comparing offers, it's essential to ask for the Annual Percentage Rate (APR), which reflects the total cost of borrowing, including all fees, not just the interest.
Understanding Loan-to-Value (LTV)
The Loan-to-Value (LTV) ratio determines the maximum amount you can borrow against your gold. The Reserve Bank of India (RBI) regulates this to protect both lenders and borrowers. Currently, the RBI has a tiered LTV structure: you can get a loan of up to 85% of your gold's value for amounts up to ₹2.5 lakh. For loans between ₹2.5 lakh and ₹5 lakh, the LTV cap is 80%, and for loans above ₹5 lakh, it is 75%. It is important to remember that lenders value only the net weight of the gold, excluding stones, gems, and other metals. Furthermore, the valuation is based on the purity of the gold (typically 18 to 22 karats) and the average market price over the last 30 days, not necessarily the price on the day you apply. This means the amount you receive might be less than you expect based on the current retail price of gold.
Choosing Your Repayment Plan
Lenders offer several repayment structures, and your choice has a significant impact on cost and risk. The most common is the Equated Monthly Instalment (EMI) option, where you pay back both principal and interest every month. Another option is to pay only the interest each month and settle the entire principal amount at the end of the tenure. A third type is the bullet repayment, where you pay the full principal and accumulated interest in a single lump sum at the end of the loan term. While bullet repayments offer the convenience of no monthly payments, they are also riskier. Interest compounds over the tenure, and since April 2026, new RBI norms mean the LTV for these loans is calculated on the total repayment amount (principal plus interest), which can reduce the initial cash you receive.
The Serious Consequences of Default
Defaulting on a gold loan has consequences that go beyond losing your pledged jewellery. The first step a lender will take is to send you reminders and apply penalty interest on the overdue amount. These penalty charges can be steep, sometimes as high as 2% per annum on top of your existing interest rate. If you continue to miss payments, the lender will issue a formal notice before proceeding to auction your gold to recover their dues. If the auction proceeds are not enough to cover the outstanding loan, you may still be legally liable for the remaining balance. Furthermore, a default is reported to credit bureaus, which will negatively impact your credit score, making it difficult and more expensive to secure any type of loan in the future.
