How Gold Loans Work

Gold Loan Process Overview

A gold loan in India follows a clear, predictable process — from the customer walking in with gold to walking out with cash and eventually returning to collect their jewellery. Understanding each stage helps both borrowers and lenders manage the relationship effectively.

Stage 1 — Customer Arrives with Gold

The customer walks into a pawn shop, bank branch, or NBFC outlet carrying gold jewellery they wish to pledge. No appointment is needed; gold loans are typically walk-in, on-demand services. The customer brings their Aadhaar card (and PAN for larger amounts) along with the gold items they want to pledge.

At a professional pawn shop using gold loan software, the staff first checks whether the customer is already in the system. For returning customers, their KYC details are retrieved instantly. For new customers, fresh KYC is collected — Aadhaar, photograph, and mobile number — a process that takes 3–5 minutes.

Stage 2 — Gold Weighing and Valuation

Every item of gold is placed on a calibrated digital scale and weighed individually to the nearest 0.01 gram. The purity (karat) is then verified using an acid test kit, touchstone, or XRF machine. BIS hallmarked jewellery can also be verified using the HUID code on the BIS Care app.

The gold value is then calculated:

Making charges (if visible on bill) and the value of stones are typically excluded from this calculation — only the intrinsic gold value counts toward the loan.

Stage 3 — Loan Offer and Pawn Ticket

Based on the calculated gold value, the lender offers a loan amount at their applicable LTV percentage — typically 65–75% of gold value. The customer can accept the offered amount or negotiate within the permissible range. Once agreed:

• A pawn ticket is generated (printed by software or handwritten) showing all loan terms — amount, rate, due date, monthly interest
• Both the pawn broker and customer sign the pawn ticket
• The customer receives their copy of the pawn ticket
• Cash is disbursed immediately or transferred to the customer's bank account
• The gold is placed in a sealed cover tagged with the pawn ticket number and stored in the vault

Stage 4 — Interest Payment During the Loan Period

From the first day of the loan, interest accrues at the agreed annual rate. Most pawn brokers collect interest monthly — either on a fixed monthly date or on the same date as the pledge each month. The customer must pay only the interest to keep the loan active:

Good pawn shops send automated SMS reminders 15, 7, and 3 days before the due date — ensuring customers remember to pay and reducing overdue accounts significantly.

Stage 5 — Loan Renewal

If the customer cannot repay the full principal at maturity but wants to continue the pledge, the loan can be renewed. The customer pays all outstanding interest, and a new pawn ticket is issued for the same principal with a new due date. Renewals are common — many customers renew gold loans 2–4 times before final closure.

Stage 6 — Full Repayment and Gold Return

When the customer is ready to close the loan, they pay the outstanding principal plus all accrued interest. The pawn broker retrieves the sealed gold cover from the vault, opens it in front of the customer, and returns the items. A closure receipt is issued. The loan is marked closed in the register.

The gold inspection at return is a critical moment — the customer verifies that all items are present and in the same condition as when pledged. This prevents disputes and builds long-term trust.

Stage 7 — Default and Auction Process

If the customer does not repay and stops responding to reminders, the loan becomes an NPA (Non-Performing Asset). The pawn broker must follow the state Pawn Brokers Act's procedure:

• Minimum 3 formal notices sent to the customer at specified intervals
• Auction announced in the prescribed manner after notice period expires
• Gold auctioned at current market rates — not distressed prices
• Outstanding principal + interest + reasonable costs deducted from auction proceeds
• Any surplus returned to the customer promptly

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