How to Leverage Gold as Collateral for Loans

With skyrocketing gold prices, it’s no surprise that more people are investing in gold. However, despite the fact that gold can be a good long-term investment, it does have some limitations, particularly when it comes to liquidity.

Finding a buyer at the best price can be time-consuming, and when you’re in a bind and need cash quickly, selling your gold may not be easy compared to selling other precious metal investments like shares of gold stocks or gold exchange-traded funds.

However, there is a way to leverage your gold in order to quickly access cash: Use your gold as a collateral on a loan. Since your gold acts to secure the loan, you’re more likely to qualify for a loan — even if you have a less-than-perfect credit score.

How do gold loans work?

A gold loan is a secured loan, meaning you provide something valuable as collateral. If you stop making payments, the lender can keep your collateral and potentially sell it to recoup the amount you still owe.

Here’s how a gold loan works:

1. You provide the gold

Decide whether you want to offer gold coins, gold bars or gold jewelry as collateral. Depending on the type of gold you’re holding, you may need to have 10-karat, 14-karat, 18-karat, 22-karat or 24-karat gold in order to secure a loan.

IRS-approved gold coins, such as American Eagle Gold Proof Coins, are 22-karat gold. Businesses that will accept these and other gold assets include online gold dealers or in-person coin collectors and pawn shops.

2. The lender offers an amount and terms

Your gold will be assessed for its quality and value. If you have any certificates of authenticity, provide them to make the process easier.

The lender will want to examine the gold to determine its purity, quality and weight. They will then offer you an amount and an interest rate based on those factors.

3. Leave the gold with the lender

Your gold is collateral to secure the loan, so you must leave it with the lender. If you’re using a mail service, make sure it’s reputable. Normally, you need to send in your gold and they will store it at a secure facility until you’ve repaid the loan.

Often, mail services include insurance. If they don’t, read our guide on how to insure physical gold.

Local pawn shops and coin collectors will arrange to store the gold until you make your final payment. Typically, they will give you a receipt or some other paperwork stating what gold items the lender is holding in your name; make sure you keep those records! They may be necessary to redeem your gold later.

You receive your gold back once you satisfy the loan amount with interest.

Pros and cons of a gold loan

Before you decide to use your gold as collateral, you should first understand the advantages and disadvantages of doing so to secure a loan.

Pros

• Use something valuable for cash without selling it. When you get a gold loan, you still own the asset. You don’t have to sell your coins, bars or jewelry in order to get cash.

• You can get approved with bad credit. An unsecured personal loan requires that you have relatively good credit to avoid paying a very high interest rate. You might not even qualify for a personal loan with poor credit. However, with your gold as collateral, a lender might be willing to provide the cash amount knowing they can sell the gold if needed.

• Rates can be lower compared to unsecured loans. Depending on the lender and other factors, you might be able to get a lower interest rate than you would normally get with an unsecured loan.

• Receive a relatively large amount, depending on the value. Based on the value of your physical gold, you might be able to secure a relatively large amount. Some online lenders will provide as much as $25,000 or more if your gold is of high quality.

Cons

• You could lose your gold collateral. As with any other secured loan, you run the risk of losing your asset if you fail to satisfy the loan’s terms. If you can’t make payments and you default on the loan, the lender can keep your gold. If you’re using jewelry with sentimental value, you might not want to risk the loss.

• Interest rates and fees can be high. Even though you might be able to get a gold loan with bad credit, it doesn’t stop you from paying potentially high interest rates and fees. The quality of the gold might influence your interest rate. You can save on interest and fees if your gold is of sufficiently high quality.

• Limited loan amounts. The value of your gold limits your loan. Additionally, you likely won’t receive 100% of the value of your loan. Depending on the situation, you might only get an advance of up to 75% of the gold’s value.

• Funding can take time. Because of the nature of using gold as collateral, receiving your funds can take up to a week or longer. You might get your cash faster at a local coin or pawn shop, but it might still take several days before you receive the money.

Who should get a gold loan?

Before getting a gold loan, make sure it’s the right move for you. It doesn’t make sense for everyone, so examine your situation before moving forward. Here are some factors to consider if you’re thinking about using gold as collateral for a loan:

Term length

Consider getting a gold loan only if you know it will be a short-term advance. Try to pay off the loan as quickly as possible so you can recover your assets.

Credit score

In some cases, especially if you have poor credit, you might be better off getting a gold loan. While rates can be relatively high, they are often still lower on a secured loan than they would be for an unsecured loan with bad credit.

If you can’t get the money you need with an unsecured personal loan due to a low credit score, using gold as collateral for a loan might be a good choice.

You have high-quality gold

Taking a gold loan works best if you have high-quality jewelry, coins or bars. Check to make sure your gold is investment-quality. If you have enough of it, and you don’t have to bring it all in, a gold loan might make sense.

You can wait a few days for the money

A gold loan can be a good choice if you’re not dealing with an immediate issue. If you need fast cash, you might be able to get it from a coin shop loan, but you still might have to wait.

Bottom line on using gold as collateral for a loan

High-quality gold can be used as collateral to get a secured loan. However, weighing the risk of losing your gold assets if you can’t make payments is important. Make sure you can get the money you need at a reasonable interest rate before moving forward.

More from Money:

Best Gold IRA Companies

Best Online Gold Dealers

Beginner’s Guide to Investing in Precious Metals