If you are planning to take a Gold Loan, be aware of these common mistakes to avoid financial setbacks. Here is an outline of key mistakes to avoid so you can maximise the value of your gold assets.
Indians cherish gold not only as an investment but also as a financial asset for emergencies. When they require immediate funds, they turn to a loan against gold as a quick and convenient borrowing option. However, while a Gold Loan offers flexibility and quick disbursal, borrowers often make errors that reduce the benefits or increase the loan cost. If you are planning to take a Gold Loan, be aware of these common mistakes to avoid financial setbacks. Here is an outline of key mistakes to avoid so you can maximise the value of your gold assets.
- Not Checking the Gold Loan Per Gram Rate
Most borrowers overlook the Gold Loan per gram rate. It determines the maximum loan amount you can obtain against your pledged gold. The current market price of gold determines the rate, which varies among lenders. Failing to check this rate often results in receiving a lower loan amount than your gold’s actual worth. Therefore, always compare the rates offered by multiple lenders before deciding. Even a minor difference of Rs 100 – Rs 200 per gram could translate to thousands of rupees when you are pledging a larger quantity of gold.
Also, verify whether the lender calculates the interest rate based on 18K or 22K gold purity, as this affects the loan amount and valuation. Additionally, check the Loan-to-Value (LTV) ratio offered by the lender. At the same time, RBI guidelines specify tiered LTV limits on the borrower’s total exposure across all loans against gold:
- Up to 85% LTV allowed if the borrower’s total exposure is up to Rs 2.5 Lakh.
- Up to 80% LTV allowed if the total exposure is above Rs 2.5 Lakh and up to Rs 5 Lakh.
- Up to 75% LTV allowed if the total exposure is above Rs 5 Lakh.
Being aware of these factors ensures you make an informed decision aligned with regulatory standards and your borrowing needs.
2. Ignoring the Repayment Terms
Many borrowers focus solely on the loan amount and interest rate and neglect the repayment terms. Some lenders offer flexible repayment options, like paying only interest during the tenure and the principal at the end.
Select a plan that aligns with your cash flow. For instance, if you are a business owner with seasonal income, a flexible repayment option might be ideal. Conversely, if you are a salaried individual, paying only the interest rate may be more manageable. Consumption bullet loans have a maximum tenure limit of 12 months, with a renewal policy available at the end of the tenure, allowing for continued flexibility in repayment.
3. Taking a Loan Without Assessing Your Repayment Capacity
Never be lured by a high loan against gold amount, especially when you know your gold is valuable. However, overestimating your repayment ability can create long-term financial stress. Many people borrow the maximum eligible amount without a clear repayment plan. However, failure to repay could result in the loss of your gold.
Before applying for a Gold Loan, carefully evaluate your income, expenses, and existing EMIs to ensure you borrow only what you can confidently repay within the loan tenure. As per the RBI guidelines, lenders are required to conduct a thorough credit assessment for all loan applications exceeding Rs 2.5 Lakh, ensuring responsible lending and borrowing practices.
4. Choosing Unauthorised or Unregulated Lenders
The ease of securing a loan against gold sometimes leads people to local pawnshops or unregulated lenders. While they may promise instant cash with minimal documentation, these entities often charge exorbitant interest rates and can use unethical practices in case of delays.
Always choose an RBI-regulated financial institution. These lenders prioritise transparency and adhere to strict regulatory compliance, offering you better interest rates and enhanced safety for your investment. A regulated lender will disclose the prevailing Gold Loan per gram rate, ensuring you receive a fair and trustworthy deal. This commitment to transparency and compliance safeguards your interests throughout the borrowing process.
5. Not Comparing Interest Rates and Fees
Gold Loan interest rates can vary significantly between lenders. While some lending institutions may offer competitive rates, others charge higher rates depending on your profile and repayment plan. Apart from the interest rate, also consider the processing fees, valuation charges, prepayment penalties, and other applicable charges. Sometimes, a low-interest loan can be more expensive after adding all the charges.
Use an online calculator to compare loan offers before selecting a lender. Even a difference of 1–2% in the interest rate can significantly affect your finances over the loan tenure. It is essential to ensure the lender provides full disclosure of all charges and fees, including a Key Facts Statement (KFS) as mandated by the RBI.
6. Pledging All Your Gold Assets at Once
Many people make the mistake of pledging all their gold to get the maximum loan amount, especially when they need a substantial sum. However, you must keep some of your gold reserves untouched. Pledge only what’s required to retain a financial cushion for future emergencies. Since the Gold Loan per gram rate changes frequently, you might get a better value if you wait for a favourable rate later.
According to RBI guidelines, the maximum collateral quantity allowed per borrower is limited to 1 kilogram of gold ornaments, promoting responsible borrowing within set limits.
7. Not Keeping Track of Market Trends
The gold rate fluctuates based on market demand and international gold prices. Taking a loan against gold when prices are low may mean a lower loan amount for the same quantity of gold. If you do not need urgent funds, track gold prices for a few weeks and apply when the rates are higher. Some lenders also update their loan rates weekly. Therefore, time your loan application to maximise your benefits.
Additionally, stay informed about the RBI’s latest guidelines, including new rules effective from April 1, 2026, which may impact Loan-to-Value (LTV) ratios. Being aware of these regulations will enable you to make more informed and strategic borrowing decisions.
8. Overlooking Gold Quality Assessment
Some borrowers assume that lenders accept all gold items for a loan. However, lenders typically assess the purity of your gold asset and only consider items with a minimum purity of 18K. They may undervalue or reject items that have embedded stones or are antique jewellery. As per RBI guidelines, the valuation of gold excludes the value of gemstones or decorative elements. Borrowers have the right to be present during the assaying process and to receive an assay certificate as proof of valuation. Always confirm the acceptable purity levels and whether the lender deducts weight for stones or designs, as this directly affects the Gold Loan per gram value you receive. To avoid surprises, it is advisable to consult a professional for asset evaluation or check with the lender before proceeding.
9. Failing to Offer Complete Documentation
Documentation might seem trivial when you need an urgent loan against gold. However, proper paperwork is crucial to get maximum value and quick approval.
As per RBI guidelines, standardised loan agreements must be provided to the borrowers, along with proper KYC documentation to verify identity and address. Additionally, communication and all loan-related documents should be made available in the borrower’s local language to promote clarity and transparency.
Adhering to these requirements not only facilitates a smooth loan process but also protects the rights and interests of both the lender and borrower.
10. Not Considering the Loan Tenure Carefully
Gold Loans are typically short to medium-term, with tenures ranging from a few months to a few years. However, for consumption loans, the RBI mandates a maximum tenure of 12 months. Opting for a longer tenure may result in higher interest payments, while a shorter tenure could put pressure on your monthly finances. It is important to carefully assess your repayment capacity and select a tenure that strikes the right balance, ensuring manageable and timely repayments.
Taking a loan against gold can be a wise financial decision. However, avoiding the mistakes mentioned above will help you get the best value for your gold while securing your financial future.