Digital Gold Loan Vs Physical Gold Loan - What's the Difference?

Gold has been used as a symbol of status, power, wealth and a store of value since ancient times. Even while there have been wild swings in the price of gold from time to time, the average Indian still looks at gold as a necessary and stable investment. This feature has made gold a widely accepted collateral against loans. Many banks and NBFCs like IIFL Finance, now offer loans against gold.

While earlier, one had to deal with physical gold, today with the advent of block-chain technology, gold can be purchased in the digital form as well – this is referred to as digital gold.

In this article we look at digital gold loans versus physical gold loans. To understand the basic difference between the two, one needs to understand what digital gold is and how it is different from physical gold.

Usually, investments in gold derivatives such as Gold ETFs, Gold Mutual Funds, Sovereign Gold Bonds and Gold Future contract are all loosely categorised as Digital Gold Investments. However, in this article we refer to digital gold as gold that can be bought and sold online, that comes with the assurance 24 K gold of 99.99% purity, and of being stored in fully insured vaults on the investors’ behalf.

Today, while there are several apps that allow individuals to make digital gold investments, in reality there are only a few companies that store physical gold on behalf of digital gold investors. These are Augmont Limited, Produits Artistiques Métaux Précieux of Switzerland (PAMP) and SafeGold. Other platforms offer digital gold on the basis of their tie-ups with these companies.

Perhaps the key differences between Digital Gold vis-à-vis physical gold, is the ease of ownership, storage and security of the former. One can buy it with the click of a mouse, seated in the comfort of your home. You can ask for the gold to be delivered to you, whenever you are in need of it, or you can sell it online, on the same platform at the prevailing market rate. In the case of physical gold, one needs to make a physical journey to a jeweller or bank for the purchase. Subsequently, you have to find a safe storage place, either a safe in your house or a bank locker. Neither of these are 100% safe or secure however.

Another key difference between digital gold investments to physical gold is that you can invest as little as Re. 1 towards it’s purchase. In the case of physical gold, one usually needs to buy at least a gram at a time. You may be able to buy less in the form of small pieces of jewellery, buy jewellery making charges generally range between 3% to 25% or more depending on the intricacy of the workmanship.

While availing a gold loan, the making charge that you paid for the jewellery is not included in the valuation. In addition, the purity level of physical gold varies from piece to piece. Gold rates also vary from jeweller to jeweller and lender to lender. Thus, at the time of taking a loan against physical gold, you are forced to depend and accept the lender’s valuation of the gold. In the case of digital gold, the digital gold price is uniform across the country and the value of your investment is clearly visible in the investment platform.

You can avail loans against both digital gold and physical gold. In the case of physical gold, one needs to go to a jeweller, bank or NBFC dealing in gold loans. Else there are also several platforms, such as IIFL Finance, offering online gold loans. In the case of the online gold loans, one needs to fill in details of the gold you wish to offer as a collateral and your personal details. Thereafter, the platform offering a gold loan will send a representative to your doorstep to evaluate and collect the gold. The loan amount is then transferred to your doorstep almost instantly.

If you are providing gold jewellery as the physical gold loan collateral, the value of loan offered to you will only be around 70% of the base value of the gold. To illustrate, suppose you put gold ornaments of 24 K purity, weighing 20g, as a collateral for a gold loan. Let us assume that you may have paid INR 119,000/- plus making charges of INR 20,000/-, totalling INR 139,000/- for the jewellery. However, the loan offered to you will only be around 70% of INR 119,000/-, i.e roughly INR 83,000/-.

In the case of digital gold there are no associated making charges. Therefore, the loan value will be higher for the same initial investment. However, there are currently very few platforms offering loans against digital gold. India Gold offers up to INR 60,000/- loan for digital gold kept in its locker.

The ease of buying and selling digital gold makes it an extremely liquid asset. When faced with a temporary cash crunch, one need not take the trouble of applying for a loan at all. All you need to do is sell the gold online. You can always buy the digital gold back when you have the funds and have passed the cash crunch phase. You will not have to pay any interest or loan processing charges.

In addition, if you are lucky, you could buy the gold back at a lower price if the markets fluctuate in a downward direction. In the case of physical gold, you have to pay the entire loan amount along with the interest. What you need to keep in mind, however, is that while selling digital gold, any capital gains is taxed in the same manner as capital gains on sale of physical gold.