Ideally, borrowing should be avoided unless it is necessary to acquire an asset that would enhance future income or save current expenses. Businesses also take out short-term loans to meet their working capital needs.
However, in an emergency, it may be necessary to take out loans to meet the unexpected increase in expenses, especially if there is no adequate emergency fund.
There are two types of loans: secured loans and unsecured loans. Obtaining a secured loan involves pledging an asset as collateral, which can be sold to recover dues if the borrower is unable to repay the principal and pay interest on it.
Due to the presence of underlying assets as collateral, secured loans are generally less expensive than unsecured loans. Borrowing to acquire assets generally falls into this category.
On the other hand, in the absence of any collateral assets that can be sold to recover the loan amount, financial institutions usually charge higher interest on unsecured loans, such as personal loans.
However, to reduce the interest on loans – not contracted for the purchase of assets – one can keep investments (for example, mutual funds, insurance, shares, etc.) or movable assets (for example, gold, jewellery, etc.) as collateral, which can be sold to recover the loan amount in the event of insolvency.
With the costs involved in securing idle gold, it is best to take out a gold loan, if necessary, to reduce the cost of borrowing as well as the cost of holding physical gold.
“You may be surprised to learn that 80% of Indian households have unused gold at home or in bank lockers! This gold can easily be economically mined to apply for a loan, compared to other types loans,” said Nitin Misra, co-founder of indiagold.
“Think of it as someone who owns a nice 1 BHK beachfront apartment in Goa and then only uses it 1-2 months a year. Wouldn’t it be worth earning the rest of the year by putting it on Airbnb? Gold, as an asset, is similar in that sense,” he added.
Misra lists the benefits of taking out gold loans:
- Gold loans come with low interest rates and the flexibility to pay interest as well as principal at the end of the loan term i.e. hassle free for EMIs.
- It does not involve any processing fees or foreclosure fees. In addition, the renewal or extension of the loan is free and simple.
- Gold loans can be obtained with minimal documentation, without strict terms and conditions such as proof of regular income or credit score.
“So in a country like India, where 83% of the workforce is self-employed, gold loans just make sense,” Misra said.