Explained: Why gold financiers often offer more top-up on existing loan

Gold is often regarded as one of the safest forms of investment. This precious metal holds its value over time, providing investors a reliable source of wealth even during economic downturns. An offshoot of this quality is the rise of gold loans, where borrowers can leverage their gold holdings to secure financing from banks or financial institutions.

Top-ups refer to an additional loan taken over an already existing one. It is an add-on facility that lenders offer to their existing customers. This additional credit is extended on the condition that the borrower has been punctual with repayments on the existing loan. The offering of a top-up loan is dependent on the ongoing loan amount and the repayment history.

But why do gold financiers offer top-up loans, and why are they often more generous with these top-ups? Let's delve into the rationale.

Understanding the lucrative nature of gold loans

The primary reason gold financiers offer generous top-ups lies in the nature of gold loans. A gold loan is a secured loan, meaning that the borrower's gold serves as collateral. In the event that the borrower defaults, the bank or financial institution can recoup their losses by selling the gold. This makes gold loans less risky for lenders compared to unsecured loans, like personal loans, where there's no collateral involved.

Moreover, as a gold loan is among the most profitable loans for banks, they are free from the worry of non-performing assets (NPAs). The gold remains with the bank even if the borrower defaults, ensuring the lender's investment is always protected.

Top-ups: A win-win situation

Top-ups on gold loans are beneficial to both parties involved. From the lender's perspective, these top-ups generate additional income through interest payments without requiring any additional collateral. The existing gold loan, backed by the borrower's gold, covers the risk. The bank, therefore, has the assurance of being able to recoup the loan amount if necessary.

Financial outlook: The debate of gold vs sensex

Amidst these discussions on the advantages and reliability of gold loans and their top-ups, it's also essential to consider the potential long-term returns and the broader financial outlook.

Zee Business Managing Editor Anil Singhvi brings forth a noteworthy perspective in the age-old debate of gold versus equities. While gold loans can provide an immediate financial solution, creating significant wealth might require diversifying your investments, including buying equities.

Singhvi stated that “gold can make money for you but not create big amounts of wealth”. He drew attention to the performance of the Sensex, India's equity benchmark, compared to gold returns since 1979. In this period, Singhvi pointed out, the Sensex has grown more than tenfold compared to gold returns. “Sensex has given a return of 608 times during this period, and gold multiplied by 56 times,” he noted.

“One has to think long term while judging returns,” he advises, indicating the need to balance the portfolio with a mix of gold, equities, and perhaps commercial real estate. It’s a reminder to all investors that while gold provides security and immediate liquidity through instruments like gold loans, an investment strategy for wealth creation must consider a more diversified approach.