Israel Iran War: Why borrowers should be cautious about gold loans despite the expected boom in gold prices

Borrowers should recognise that gold prices can move both ways

• Gold loans rose over 125% YoY, exceeding Rs 3.3 lakh crore.
• Rising gold prices and tighter unsecured loan norms drive demand
• Borrowers risk losing jewellery if repayments are delayed

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A recent sharp escalation in Middle Eastern military activity after the combined US–Israel strike on Iran has driven investors toward safe-haven assets, increasing the likelihood of gold prices rising further.

“In the short term,  gold prices often spike as headlines break and traders rush to hedge risk. Over time, however, markets settle, and prices may pull back if tensions ease. So the impact is often sharp and emotional at first, driven by fear and protection, before fundamentals and broader economic factors take back control,” said Vandana Bharti, AVP, Commodity Research at SMC Global Securities.

This renewed geopolitical tension underscores gold’s function as a store of value, but it also presents additional risks for borrowers, particularly as gold loans continue to grow at a record rate.

Jump in Gold Loans

Gold loans have grown at an exceptional pace over the past year. Reserve Bank of India (RBI) data shows outstanding gold loans rising by roughly 125 percent to 128 percent year-on-year, to well over Rs 3.3 lakh crore by late 2025, even as overall bank credit has expanded in single digits.

Gold loans have contributed a significant share of incremental personal loan growth, despite still accounting for a small portion of total bank credit.

Gold has gained nearly 87 percent and silver 181 percent over the last one year. This recent surge in gold prices has also increased the collateral value of the same jewellery and enabled borrowers to access higher loan amounts without pledging more gold. At the same time, lenders have tightened norms on unsecured personal loans, prompting both banks and borrowers to move towards secured products such as gold loans.

Clearer LTV rules and regulatory alignment have also brought greater structure and visibility to the segment. In addition, lenders now offer faster, largely digital processing and quick disbursal, making gold loans an efficient option for short-term liquidity.

Adhil Shetty, CEO of BankBazaar.com, said, "Borrowers must evaluate a few critical factors before taking a gold loan. RBI caps the loan-to-value ratio, around 75 percent for larger loans, so borrowers receive only a portion of the market value of their gold."

Shetty said that while interest rates generally range between 9-15 percent and remain lower than unsecured personal loans, lenders price these loans differently, and the total cost depends on tenure and repayment structure. "Borrowers must plan repayment carefully because any default can result in the auction of pledged gold," said Shetty.

Why one must avoid taking a gold loan

As mentioned above, most Indian lenders cap gold loans at around 75 percent loan to value. "Even 5-10 percent price corrections can suddenly shrink your safety cushion and prompt repayment pressure," said Paramdeep Singh, financial services veteran across GE Money and SBI Life & Founder of Long Tail Ventures.

Borrowers should recognise that gold prices can move both ways. Rising prices increase borrowing capacity, but a correction can reduce the collateral cushion and increase repayment pressure.

"I keep seeing far too many borrowers treat gold loans as quick liquidity, only to feel uncomfortable when volatility kicks in. From a balance sheet perspective, disciplined lenders build buffers and conservative auction triggers, but not every borrower understands how quickly that process can move in a falling market," added Singh.

This means lenders protect themselves with strict risk rules, and when gold prices fall, they can move to auction very fast, something many borrowers are unaware of.

Shetty said, "Gold loans are often positioned as a convenient short-term funding option, but they require careful evaluation. One of the primary concerns is the risk of losing pledged jewellery during repayment delays, as lenders are permitted to auction the collateral after the due notice."

This can result in both financial and emotional loss. The loan-to-value structure also means borrowers receive only a percentage of the gold's prevailing market value, limiting liquidity relative to the asset pledged.

Additionally, short-term or bullet repayment formats can increase the effective repayment burden if cash flows are uneven. During gold price volatility, borrowers may also face tighter borrowing limits at renewal.

"While gold loans can serve immediate liquidity needs, they are best considered when repayment visibility is clear and alternative, lower-risk financing options have been evaluated," said Shetty.

Thus, it is equally important to assess the purpose of the loan. Using it for productive or income-generating needs carries a very different risk profile compared to discretionary consumption.

It is a solid store of value. Leveraging it at peak prices requires caution and a clear repayment plan, not impulse.