There are many myths surrounding the concept of taking a gold loan. Before we get into what a gold loan is and the benefits that come along with it, let us take a quick look at why someone would even venture into this territory in the first place. As you may know, the price of gold has been on an upswing for quite some time now. But what does this have to do with you? Well, as interest rates continue to remain low, there’s been an increase in loans that offer higher fixed rates than normal bank savings accounts or fixed deposit accounts. And yes, these are loans that you take out from banks so they can use your funds elsewhere. But more on that later.
What is a gold loan?
A gold loan is a type of loan that you take out from a bank that you then use to buy an asset that’s backed by gold. So, yes, you buy gold with your own money to secure the loan. Unlike buying gold bullion, however, you don’t own the gold that’s backing your loan. Instead, the gold is held in trust by the bank, who then lends you the amount you need. But why would a bank even want to do this? Gold loans may seem like a weird business model, but they have some very practical benefits, especially in today’s low interest rate environment. So, let’s find out what these are.
Why take a gold loan?
Higher Interest Rate: If you’re considering taking a gold loan, the first thing that you need to know is that it’ll give you a very high interest rate. While most banks offer a fixed rate for savings accounts, gold loans come with a variable rate that’s based on the current interest rate environment and the amount that you’re borrowing. So, if interest rates remain low, the interest rate will be higher. And if interest rates go up, the rate will be lower. - Easier Access: Gold loans beat saving and investing in stocks. While the later is an extremely long-term investment, gold loans are a much more accessible option. This is because you don’t have to buy gold with your own money. You can use a third-party seller that’s connected to the bank as a middleman. - Tax Advantages: Unlike stocks, which are considered assets, gold is considered a currency. This means that it has certain tax advantages over the stock market. For example, you don’t have to pay taxes on your gold when you sell it. You also don’t have to pay taxes on the interest that you earn from your gold loan.
Advantages of taking a gold loan
Disadvantages of taking a gold loan
Higher Costs: Gold loans come with higher costs than other loans. This includes the interest charged on the loan and the fees charged by the bank. - Greater Risk: Gold loans come with greater risk than other types of investments like stocks or savings accounts. You could lose all your money. And the price of gold could plummet, resulting in a loss. - No Equity: Investing in stocks comes with the advantage of owning a small share in the company that you’re investing in. This share of equity is known as equity. With gold loans, however, you don’t get any equity.
Gold loans may seem like a risky venture. But that’s not the case. Like many other loans that come with a high interest rate and a variable interest rate, the interest rate on a gold loan goes up when interest rates remain low. And yes, it’s a very high interest rate. But if interest rates go up, the interest rate on your loan will go down. And if you need the money for a few months, it’ll be much easier to withdraw from your gold loan than from a savings account. With all these benefits, it makes sense to take a gold loan.