Ideally, one should avoid borrowing unless there is a need to acquire an asset that would either enhance future income or save on current expenses. Businesses also take out short-term loans to meet their working capital needs.
However, in emergencies, you may need to take out some borrowings to cover the unexpected increase in expenses, especially when there is not enough emergency fund.
There are two types of loans – secured loans and unsecured loans. Obtaining a secured loan involves pledging an asset as collateral that can be sold to collect fees if the borrower is unable to repay the principal and pay interest on it.
Because of the presence of underlying assets as collateral, secured loans are generally cheaper than unsecured loans. Loans taken out to purchase assets generally fall into this category.
On the other hand, in the absence of an asset as collateral that could be sold to recover the loan amount, financial institutions generally charge higher interest rates for unsecured loans – like personal loans.
However, to lower interest rates on loans not taken out to purchase assets, one can keep investments (e.g., mutual funds, insurance, stocks, etc.) or movable assets (e.g., gold, jewelry, etc.) as collateral, which are used to The loan amount can be sold to repay in the event of insolvency.
Given the costs involved in ensuring the safety of idle gold, it is best to take out a gold loan if needed to reduce the cost of borrowing as well as the cost of storing the physical gold.
“You may be surprised to learn that 80 percent of Indian households have gold at home or in safe deposit boxes! This gold can be easily used economically to apply for a loan compared to other types of loans,” said Nitin Misra, co-founder of Indiagold.
“Imagine someone 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 listing it on Airbnb? Gold as an asset is similar in that sense,” he added.
Misra lists the benefits of taking gold loans:
- Gold loans come with low interest rates and the flexibility to pay both interest and principal at the end of the loan term – meaning no hassle with EMIs.
- There are no processing fees or foreclosure fees. In addition, renewing or extending the loan is free and easy.
- Gold loans can be availed with minimal documentation, free from strict terms and conditions like regular proof of income or credit history.
“In a country like India, where 83 percent of the workforce is self-employed, gold loans just make sense,” Misra said.