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Why gold loans are better than overdraft against FDs?


There are a series of loans offered by banks, NBFCs, and other financial services providers for different needs. However, the categories of loans are divided into secured and unsecured loans. As the name suggests, secured loans require borrowers to pledge an asset or security for the money they borrow. Meanwhile, unsecured loans are not secured by collateral. Gold loans and overdrafts against fixed deposits both fall under the category of secured loans. But why are gold loans better than overdrafts against FDs?

Under gold loans, a borrower pledges their gold articles as collateral to borrow money from financial services providers. This type of loan comes in handy, especially during emergency cases. Banks take your gold as collateral for a specified period of time which can be the tenure of the loan. While interest rates are levied on borrowers which need to be paid in the form of EMIs. Once, a borrower repays the entire loan, banks return back the physical gold assets. However, generally, physical gold is taken as collateral between 18-carats to 22 carats.

Earlier this August, RBI relaxed the loan-to-value ratio for gold loans to 90% against the previous 75%.

Coming to overdraft against fixed deposits, this type of loan is seen as a prominent kind of investment as they can opt for both short and long-term financial requirements. Typically, your FDs are utilised as a security to avail loans for various reasons whether be education purposes, or even buying products among others.

Banks generally offer 90% overdrafts against the FD value. Some of the benefits of overdraft against FDs are — loans can be availed even if your credit score is low and if you do not meet income eligibility criteria that’s because FDs are kept as security. The interest rate that needs to be repaid on these loans is low and somewhat above 1-2% above the interest rates offered on FDs. You can also use the FD amount to clear off loans and reduce your EMIs.

Which is better gold loans or overdrafts against FDs?

According to Umesh Mohanan, director and CEO of Indel money, gold loan scores over other secured loan options including overdraft against FDs primarily thanks to its easy availability. The gold loan comes with easy documentation, faster disbursal and flexible tenures. One can avail tax benefits on gold loan if the funds are utilised to build or purchase a residential property, finance home improvement and business expenses, etc.

Meanwhile, Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo explains that gold loan turns out to be of great value in emergency situations as it is easy to avail with faster processing and the requirement of few essential documents only. As it is a secured loan, a bad CIBIL score will not restrict you getting faster approval. In fact, one can improve his/her credit score by making timely payments of the EMI.

Manchanda further highlights that if you have taken a loan against gold for the purpose of home improvement, the construction or purchase of a residential property, then you can avail tax deduction of upto 1.5 lacs under Section 80C of the Income Tax Act, 1961 on principal repayment. You can also claim a tax deduction of up to Rs. 2 lakhs on interest paid in a year under Section 24 of the Income Tax Act, 1961 for construction or purchase of residential property. Please note that gold loan taken for personal use will not have any tax benefits.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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