Gold has long been considered a symbol of wealth and security. In times of financial need, many people look to their gold jewellery or bullion as a potential solution to their cash crunch. However, when faced with the decision of whether to take a gold loan or sell gold, it can be difficult to decide the best option.

Both choices have their benefits depending on your financial situation and long-term goals. So, what’s the better way—selling gold in the market or taking a gold loan? Let’s explore the different aspects that influence this decision.

Understanding Gold Loan:

Gold loan is one of the secured loan options where borrowers pledge their gold ornaments or coins as collateral to obtain funds from a financial institution. The sanctioned loan amount depends on the gold’s purity, weight, the prevailing market rate and the allowed LTV. The loan-to-value (LTV) ratio determines the maximum amount you can receive against the pledged gold.

Gold Loan Amount Vs Selling Value:

When taking a gold loan, you can borrow up to 75% of your gold’s market value, as per RBI regulations. For example, if gold is valued at Rs.50,000 per 10 grams, pledging 20 grams of gold jewellery could get you a loan between Rs.70,000 and Rs.75,000. The process is quick, with funds often disbursed within hours.

However, gold loans come with interest charges, usually ranging from 15% to 24% per year. If you borrow Rs.70,000 for a year, the total interest payable could be anywhere between Rs.10,500 and Rs.16,800, depending on the lender's terms.

Selling gold, on the other hand, provides full payment upfront, but deductions such as brokerage fees and making/wastage charges (generally 15%) may apply. In most cases, you can expect to receive around 90-95% of the market value, depending on the gold’s purity and buyer evaluation. Gold sales also involve value loss, as buyers might not offer a good price for the design and making charges component. While there are no interest costs, selling means parting with the gold permanently, potentially missing out on future price appreciation.

Gold Loan Vs Selling Gold:

Let’s understand the two scenarios better with an example-

Let’s assume you own 50 grams of gold, and the current market price of gold is Rs.5,200 per gram. This means the total value of the gold is Rs.2,60,000 (50 grams × Rs.5,200).

Scenario 1: When you take a gold loan

• Loan Amount: Most lenders offer up to 75% of the gold’s market value, which amounts to Rs.1,95,000.
• Interest Rate: Assuming an annual interest rate of 18%.
• Loan Tenure: 1 year.

At the end of the year, the repayment amount would be:

• Interest = Rs.1,95,000 × 18% = Rs.35,100
• Total Repayment = Rs.1,95,000 (Principal) + Rs.35,100 (Interest) = Rs.2,30,100

Here, if you fail to repay, the gold could be auctioned by the lender to recover the outstanding loan.

Scenario 2: When you sell the gold asset

• Selling Price: Assuming the jeweller offers 92% of the market price (considering the average value one receives on selling is 90-95%).
• Sale Amount = Rs.2,60,000 × 92% = Rs.2,39,200

If the gold was purchased more than three years ago, long-term capital gains tax (LTCG) applies at 20% after indexation benefits. Assuming an indexed gain of Rs.20,000:

• LTCG Tax = Rs.20,000 × 20% = Rs.4,000
• Net Sale Amount = Rs.2,39,200 - Rs.4,000 = Rs.2,35,200

Comparison: Gold Loan vs. Selling Gold

A gold loan allows you to access funds quickly while retaining ownership of your gold, but it comes with the responsibility of repayment and interest. On the other hand, selling gold offers a higher immediate payout but means parting with the asset permanently, and may also involve capital gains tax.

Which Option Should You Choose?

The decision between a gold loan and selling gold depends on your immediate financial needs and long-term goals. So,

• If your immediate need is cash and you are willing to lose your gold permanently, selling it will give you more liquidity than a gold loan.
• If you need cash but the asset hold a sentimental value and you want to retain its ownership, taking a gold loan is a viable option. However, you’ll need to ensure that you can repay the loan and its interest on time. The interest paid on the loan will add to the overall cost of borrowing.

Before goind ahead with either of the options, evaluate factors like tenure, interest rates, tax implications, market rate, gold purity, and sentimental value to make an informed choice. And if you decide to take a gold loan, consider HDB as your finance partner. HDB Financial Services offers gold loans with quick processing, flexible tenure options, and competitive interest rates, ensuring a hassle-free way to access funds while retaining ownership of gold.