Gold Loan vs. Gold Overdraft: Understand the Hidden Risks of Flexibility

CA Abhishek Walia, co-founder of Zactor Money, highlighted the significant differences in borrowing outcomes for two individuals pledging the same amount of gold for Rs 3 lakh. One chose a standard gold loan, which provides a fixed sum with clear Equated Monthly Instalments (EMIs) and a predictable repayment plan, typically at 8-9% annual interest. The other opted for a gold overdraft facility, which offers flexibility to withdraw funds as needed and pay interest only on the utilized amount.

Impact: The core issue arises when gold prices decline. Banks revalue the pledged gold, and if the Loan-to-Value (LTV) ratio falls below the required threshold (often 75%), overdraft borrowers who were only paying interest may be asked to repay part of the principal. This can turn a flexible borrowing option into a source of significant financial stress if not managed with a repayment strategy.

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Difficult terms: Gold Loan: A loan secured by pledging gold ornaments or coins as collateral. It typically involves receiving a lump sum and repaying it through fixed EMIs over a set tenure. Gold Overdraft: A flexible credit line facility where gold is pledged as security. Borrowers can draw funds up to a certain limit, and interest is charged only on the amount withdrawn, not the entire limit. Loan-to-Value (LTV) Ratio: The ratio of the loan amount to the market value of the collateral. Banks usually lend a percentage (e.g., 75%) of the gold's value. EMI (Equated Monthly Instalment): A fixed amount paid by a borrower to a lender at a specified date each calendar month. EMIs include both principal repayment and interest. Principal: The original amount of a loan or debt, excluding interest. Interest: The cost of borrowing money, expressed as a percentage of the principal.