I am a 21-year-old planning for higher studies. What are the best financing methods? Is a gold loan an option?

I am a 21-year-old student planning to pursue higher studies. I am considering taking a gold loan as my family has accumulated enough gold over the years. Should I opt for a gold loan or explore other options? 

Anshu 

As a 21-year-old student considering higher studies, you have the option to evaluate both an education loan and a gold loan. An education loan is generally recommended as it offers several advantages including tax benefits on interest payments under section 80D of the Income Tax Act and generally lower interest rates. Public banks often provide a moratorium period where repayment starts after the completion of the course, plus an additional six or 12 months after securing a job. However, it’s important to note that private lenders may charge simple interest from the first disbursement, and if not serviced during the study period, it may compound.

If you face challenges with the education loan application or lack the necessary documents, you can consider a gold loan as an alternative. One significant advantage of a gold loan is that it usually does not require a CIBIL score, and the documentation required is minimal. Leading gold loan providers may not even ask for a PAN or Aadhaar number, but they will require proof of gold ownership.

Ultimately, the choice between an education loan and a gold loan depends on your specific circumstances and preferences. It is advisable to carefully consider the terms and conditions, interest rates, repayment options, and any additional benefits or requirements associated with each option before making a decision. Consulting with a financial advisor or speaking to representatives from various lending institutions can also provide you with valuable insights to help you make an informed choice.

Sumit Sharma, Founder-Radian Finserv explains the pros and cons of funding education through a gold loan: 

At the outset, congratulations on your plans/decision to invest in yourself, education always enriches, and investment in self-development and education is the best type of investment.

There are various options for financing, and among the two that you have mentioned, let’s evaluate both.

Loans for education provide easy access to financing education expenses, and to a bright future, and are a good way of financing education costs. The lenders typically provide the money based on the future potential, and their comfort around repayment capability and propensity. Such loans often loop in parents/guardians, and the liability extends to more than just the student.

Education loans often also have a collateral against the loan. As the loan providers typically evaluate credit-worthiness and propensity to pay, the approval process is a lengthy one. There are some education loans where the repayment is pegged to future earnings, and almost invariably, such loans prove to be quite expensive and borrowers do not always realise the overall payment schedule they would be faced with, especially in comparison to precisely defined payment schedules in other loan types.

In the case of gold loans, while the gold ornament(s) are taken away and kept in custody for the duration of the loan, there are significant benefits:

The rate of interest is fixed for the duration of the loan, and there are no surprises. This is a very important aspect when taking a loan, as often the latter part of the loan tenure leads to surprises. There is a limited outflow of money on a regular basis, as only the interest is serviced during the loan tenure, and the principal paid at the end. Gold loans are easier to service.A flexible arrangement can be agreed with the lender, with a loan moratorium period, during which no amount is payable.

Given the historical price trends, the gold value is likely to go up, and the collateral is likely to appreciate in value. Importantly, gold loans and regular repayments arguably help enhance your credit rating, with limited ongoing payments. Gold loans are quick and easy, with minimal paperwork, due to a lower degree of evaluation of creditworthiness.

Overall therefore, while there are no absolute right and wrong approaches or types of loans, and there are benefits of each approach, gold loans can arguably be a preferred alternative, based on individual circumstances. The ease, speed, low repayment amounts, and importantly the definitive amounts to be repaid can make this a preferred alternative.

Wish you all the best for your studies!

(Views expressed by the investment expert are his/her own)