Gold Loans: Using Precious Metals as Collateral

How to Borrow at Scale Using Bullion as Collateral

Thanks to new regulations and specialized peer-to-peer lending solutions it’s now possible to borrow money against gold and silver investments using your bullion as secure collateral.

Once the preserve of HNW investors, Gold Collateral Loans allow bullion investors to access the value stored in their metals without the need to sell.

Bullion loans offer cash liquidity at the same time as maintaining ownership and offering the full enjoyment of capital appreciation in the asset.”

Unlike cash-for-gold or pawn operations lending retail on small value deals, gold collateral loans are aimed at investment professionals, businesses or the cash-poor wealthy looking to borrow 5, 6 and even 7 figure sums against vaulted metals.
 

 
Typically gold collateral loans charge very low interest rates due to minimal risks to the lender and run from 6 months to 10 years, with some lenders allowing borrowers to roll up any interest to the end of the agreement.

Other companies offer a flexible line of credit using the bullion assets as collateral where the total agreed line can be drawn from or reduced throughout the length of the deal.

Gold loans are typically privately funded, offered on the day of enquiry and can be completed in a few days with no details being given to credit agencies.

This makes bullion loans a quick and highly discreet service – and so it’s hardly surprising that the Bullion Loans market has seen phenomenal growth among HNWs and mid to high scale bullion investors looking for cash liquidity.

With the gold price rising into a new bull market, it’s expected that using bullion as collateral will see record volume, offering what is effectively free money – all thanks to annual interest payments far lower than gold’s year on year capital appreciation.

Arranging a Bullion Loan

Bullion Loans whether they be Gold Collateral Loans, Silver Collateral Loans or Numismatic-based are arrangements where a lender will lend money against a borrower’s existing precious metal assets.
 

Lending Process

The bullion (or numismatic coins) will be verified and valued, with the lender agreeing a Loan to Value (LTV) rate which is typically 50-70% of the total asset value.

The bullion is then vaulted and insured at a third-party secure vault appointed by the lender – and for the duration of the gold loan, neither the lender nor borrower will have access to the metals, although the owner will maintain ownership.
 

Advantages

There are multiple advantages for both parties – the borrower and the lender

The lender holds the hard asset safe in the knowledge that in the event of a default, the metals can be sold quickly on the open market thanks to bullion being a highly liquid asset. With an LTV of 50-70%, allowance is made for any drops in the price of gold and so the lender can be sure to get back all funds with a minimum of fuss.

For the borrower, overall ownership is maintained. Even though the bullion is vaulted under the control of the lender, the borrower will still enjoy all benefits from lifts in the underlying gold price during the loan period.

In a market where gold averages 10-12% yearly gains, this can help offset or fully negate interest costs and fees.

Another major advantage concerns tax.

Without the use of a bullion loan, the gold owner would need to sell their metals to raise capital – the act of liquidating the asset for it’s full monetary value (including price gains since purchase) can trigger a tax event under capital gains tax rules.

Borrowing money using bullion as collateral does not trigger a tax event as there is no sale.

Selling creates an additional disadvantage: a seller would see no benefit from price gains during the time they were using the capital raised by the sale.

Any rises in the price of gold would not be to the seller’s advantage and should they wish to reinvest in bullion at a later stage, they’d likely lose money on the deal – getting back in at both a higher prevailing price (as gold typically rises over time) and being on the wrong side of the dealer’s buy/sell spread.
 

Getting Started – Bullion Loan Companies

Despite it’s growing popularity, borrowing against gold bullion at any scale is still a specialist market with loans being made by only a handful of global players.

Bullion.Directory lists hundreds of cash-for-gold stores, with small-scale loans at fairly high interest rates – but when it comes to low-interest scaled loans on investment bullion, borrowers are limited to five main companies.

Loan amounts are subject to strict minimums to ensure fees and interest rates can be kept low. Interest rates and loan duration are highly flexible as all bullion loans are made on a case-by-case basis.

Case Studies – Using Bullion as Collateral

Reasons for taking out gold loans are as many and varied as the reasons investors hold bullion in the first place, but they are usually arranged when the borrower believes the underlying asset will perform better than the prevailing interest rate offered.

In this way the borrower leverages their assets into a liquid form for re-investment into other assets whilst holding onto the appreciating metals.

Borrowing against bullion is also popular at times when precious metals are static or dropping but the investor believes they will see large future gains where if their position was liquidated, they’d miss out.
 

*Names and some details have been changed in these case studies.
 

Considerations When Borrowing Money Against Gold

Although using bullion as collateral can provide fast, low-cost and confidential access to cash liquidity, as with any loan the borrower should have a good working plan to repay both the debt and interest to avoid increased charges or even complete loss of the metals being used as collateral.

Lenders will ask what you are planning to do with the money and where appropriate will look for a basic business plan or exit strategy.

If you require more capital than a borrower’s LTV will allow on your bullion – some lenders such as HNW Lending can take other high value assets as collateral in addition to your gold – items such as paintings and artwork, real estate, antiques and collectibles and even classic cars.

Remember, a lower LTV can reduce both the lender’s and the borrower’s risk and can lead to lower interest charges and fees. Keeping a greater equity in your collateral will also better shield you from precious metals market downturns coming just at “the wrong time” – such as if you find yourself needing to sell some or all of the bullion to repay your loan.