Indian households have, for long, turned to gold in emergencies. Today, you can borrow against it, not just as a traditional gold loan, but also as a gold loan overdraft. Both use your gold as collateral, but they work differently and offer distinct benefits. Knowing the differences can help you choose the right option for your finances.
What Is a Gold Loan?
A gold loan is a simple borrowing arrangement where you pledge your gold ornaments with the bank or NBFC to get a lump sum amount. Usually, lenders lend you up to 75–80 per cent of the gold’s value as a loan.
What Is a Gold Loan Overdraft?
This is an overdraft facility that provides you a flexible credit line that is secured by your gold. When you pledge your gold, the bank opens an overdraft account with a limit based on your gold’s value. This may be a fresh account or linked to your savings account.
Gold Loan vs. Gold Loan Overdraft
With a regular gold loan, you get a lump sum upfront and pay interest on the full amount, even if you don’t use all of it. If you need more later, you must take another loan. In contrast, an overdraft gold loan lets you withdraw money in parts, up to the approved limit, whenever you need. Interest is charged only on what you actually use.
Is a gold overdraft right for you?
The overdraft is ideal for borrowers with irregular cash needs, like small business owners managing working capital or households that need funds in stages.
Comparing Costs: Loan vs Overdraft
The difference in both gold loan and gold loan overdraft options is how interest adds up. For instance, if you take a gold loan of Rs 4 lakh at 12 per cent interest for one year, your annual interest works out to roughly Rs 26,474, irrespective of when or how you spend the money.
If you take a gold overdraft of the same limit and draw Rs 50,000 for two months and another Rs 1 lakh for the next three months, your total interest burden would be about Rs 2,760.
Repayments in Gold Loan and Gold Loan Overdraft
Gold loans: Repayments are made through EMIs or bullet payments, with interest rates usually between 8–15 per cent annually. This option works best for one-time needs such as weddings or medical emergencies because it comes with a fixed repayment schedule. The drawback is that interest starts on the entire disbursed amount from day one, even if you don’t use all the money immediately.
Gold overdraft: This option does not come with fixed EMIs. You can repay whenever you like as long as the account stays within the approved limit. Interest is charged only on the amount you actually withdraw, making it flexible and cost-effective. However, this flexibility may tempt borrowers to roll over debt longer than planned, leading to higher overall interest costs.
Which one should you choose?
Your choice should depend on your purpose. If your expense is clear and immediate, a gold loan is sensible. It disburses the entire amount upfront, and you know exactly what to repay and when. But if your cash needs are uncertain and spread across time, the overdraft could be a better choice.
Gold loans and gold overdrafts are two sides of the same coin. The former offers structure and certainty, the latter flexibility and savings on interest. In the end, the right choice depends on whether your need is a lump sum or staggered over time.
(The author is the CEO at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
