While gold loans are easily accessible, customers need to tread with caution.
Whether it is a marriage or festivals, gold on most occasions in India have a part, one of the reasons why most Indian households possess gold. This gold, usually kept in the form of jewellery, often comes to the rescue during financial emergencies. As a result, the gold loan market has stayed popular for a quick access to credit for many years now and banks and NBFCs have also started focusing on this segment.
So, while gold loans are easily accessible, customers need to tread with caution. Here are a few mistakes that you should avoid when availing a loan against your gold:
1. Not Checking Your Lender’s Credibility: Gold loan, being a secured loan, is must easier compared to options like a personal loan and requires little paperwork. Your credit score and eligibility requirement as a borrower are usually not considered when availing a gold loan. Gold loan, however, can be risky for the borrower as your gold is with the lender till the time you repay your loan completely. Hence, it is recommended to choose well established and reputed banks and NBFCs only for gold loans.
2. Not comparing your choices: Most lenders would be ready to give out a gold loan for an amount that will be decided on the basis of value of your gold. As a borrower, you should never go for the first offer. Shop around, know the market trends and rates of interest and then decide the lender. Look for lender who offers a lower rate of interest or a higher loan to value (LTV) ratio.
3. Being Negligent of the Repayment Structure: There are four different types of repayment structures that a lender may offer. It is extremely important to understand these structures and select the one that best matches your needs.
Regular EMIs- This is the basic repayment structure meant for the salaried borrowers who have monthly inflows of cash. Like other loans, repayment will be made in EMIs which will consist of both interest and principal amount.
Partial Payment- Under this structure, you are allowed to repay the interest and principal amount as and when you desire. It is not important to stick with the EMI schedule prepared in the beginning. This is a customized repayment plan made to suit the customer. For example, if you pay a better part of the principal initially, you would have to bear less interest cost in the future.
Only Interest EMI- Under this scheme, the lender asks you to pay only the interest as EMI and the principal is to be paid in full on the set date of maturity. It is good for the borrowers who are waiting for a hefty sum in the form of FD or RD maturity.
Bullet Repayment- You have to make the payment in full along with the interest at the time of loan maturity. There is no need to pay any EMIs during the loan tenure. Interest will be calculated monthly but has to be paid at the end.
4. Ignoring the nuances of LTV Calculation: Borrowers must also understand how the bank calculates the value of your loan for lending purposes. Banks and NBFCs rely on the data furnished by their central office to calculate the value of your gold and based on that they grant you a loan for up to 60% of its value. For example, if the market value of your gold is Rs 2 lakh, you can get a loan for up to Rs 1.2 lakh. As a smart borrower, you need to have a good idea about the market value of your gold.
5. Being unaware of the kind of gold you can take a loan on: Banks grant loans on gold with purity of 22 karat or above. So if you have gold which is any less pure, it may not help. When pledging a gold ornament with other precious gems studded in it, only the weight and purity of the gold will be considered for deciding the loan value. The value of gemstones will not be considered. In India, lenders however prefer to take gold jewellery as collateral as it has more sentimental value and ensures disciplined repayment from the borrower. But remember banks do not accept gold bars for giving out gold loan, nor do they accept gold bullion or gold coins above 50 grams.
Additionally, as it goes with every financial transaction, read and understand the terms and conditions thoroughly before signing on the dotted line. Please note that most lenders do not charge any prepayment penalty on gold loans; so if your lender has such a condition, you should negotiate or look for an alternative.
—by Gaurav Aggarwal – Associate Director, Unsecured Loans, Paisabazaar.com