Gold Loan vs Selling Gold: What’s the Smarter Financial Move?
Introduction
- Why gold is a trusted financial asset: Gold, over the last couple of decades, has been able to produce stable returns. It is a financial instrument which is largely used as a hedge against inflation and is typically used as a safer asset to minimise risk levels at a portfolio level.
- Common situations where people need to unlock gold’s value: What most people don’t realise is that due to gold’s amazing ability to hold value and liquidity in the secondary market, it makes for an awesome collateral to secure loans. One can avail a gold loan without having to worry about a loan history.
- Brief overview of the two options: In this article, we will discuss the two feasible options, i.e., taking a gold loan vs selling gold to avail liquidity.
- Purpose of the comparison: The purpose of the comparison is to help figure out the reader which is the most feasible for the reader in case someone holds gold and needs liquidity to serve the need.
Understanding Gold Loans
- What is a gold loan?
A gold loan is a collateral-backed form of lending where the borrower pledges their gold as collateral to the lender to avail a loan.
- How gold loans work (pledging gold as collateral)
As with any type of loan, there is risk associated with lending to the borrower. To cover this risk, the lender asks the borrower to pledge their gold. Since gold has high liquidity and holds its value really well, it serves as an amazing collateral. Once the loan is repaid by the borrower in full, including the principal component, interest, as well as any applicable charges, the collateral is returned to the borrower.
- Typical interest rates, tenure, and gold loan repayment options
Typically, the interest rates on gold loans are lower compared to the traditional forms of lending, since these are collateral-backed loans. General tenure is 12 months; however, many lenders offer various terms to more suit the borrower’s needs.
Understanding Selling Gold
- What does selling gold involve?
Selling gold involves handing over the possession of gold indefinitely to the buyer in exchange for cash consideration.
- Types of gold commonly sold (jewellery, coins, bars)
Any form of gold can be bought and sold in the secondary market. However, the most common types of gold are jewellery, such as bangles, necklaces, rings, earrings, etc. Coins and bars (These are generally of a higher purity, like 22k or 24K)
- How the gold value is determined at the time of sale
Gold is a universally traded commodity. Hence, its price fluctuates at every instance. Since the price is ever-changing, the time of sale is crucial in determining the value that can be derived from the sale.
- Market price fluctuations and deductions (making charges, purity loss)
Since the gold price fluctuates at every instant, it can affect the value of the gold that you hold. Other deductions, such as making charges and purity loss.
Gold Loan vs Selling Gold: Key Differences
- Ownership: Temporary pledge vs permanent loss of asset. With gold loans, the borrower retains the ownership of the gold as long as the gold loan is active and is being repaid; however, such is not the case with selling the gold. Once sold, the ownership shifts to the second party.
- Cost: Interest on loans vs loss of future gold appreciation. Gold loans attract interest; however, selling gold can come at a cost of future price appreciation. Hence, one should always consider these factors before making a decision.
- Liquidity Speed: Loan processing time vs instant sale. Instant sale is often fast, however may fail to fetch the desired price. Gold loan, on the other hand, has also become extremely fast. With borrower-centric features such as quick processing and disbursement by lenders like indiagold, availing gold loans can be a really feasible solution.
- Flexibility: Repayment and renewal options vs one-time transaction
- Risk: Default risk vs no recovery once sold. Default risk is when a borrower fails to repay their loan, and in such cases, the borrower loses their collateral. On the other hand, once the gold is sold, there is no chance of recovery unless the seller can buy back the gold.
Financial Comparison
- Short-term vs long-term financial impact: Availing a gold loan has a short-term financial impact in terms of interest payment by the borrower. Whereas selling gold has a long-term financial impact in terms of opportunity cost due to a potential price hike.
Factors to Consider Before Choosing
- Urgency of funds: The urgency of funds is one of the biggest factors that can influence the decision of whether to take a gold loan or sell the gold. Even though the liquidity is relatively high, however, finding a buyer at the right price might prove to be a little difficult. Hence, in some cases, availing a gold loan from a reliable lender like indiagold may make most sense!
- Repayment capacity: Repayment capacity is another factor that influences between selling or choosing a gold loan. If the repayment capacity is uncertain, then it's better to stick with selling the gold; however, if it is the other way around, then availing a gold loan makes sense!
- Gold price trends: Gold price trends also impact the decision. Gold price trends and the need for money can impact the money that can be availed.
- Emotional or investment value of gold: If the emotional value of the gold is high, then availing a gold loan makes sense.
