A gold loan, also known as a loan against gold, is a secured loan that lending institutions extend to borrowers with an aim to help them meet their immediate financial requirements. In return of the loan amount, borrowers pledge their gold articles as collateral with a promise to repay the loan amount along with the interest till the end of the loan tenure.
But at times due to circumstances, which are beyond our control, we fail to pay the loan on time. Not repaying the loan for a long time weakens the relationship between borrower and lender. In addition to this, there are a lot of other consequences that follow of which you might not know of but will do through this post. To understand the probable consequences of defaulting on a gold loan, read further:
What happens if a borrower fails to repay the gold loan by the due date?
The probable consequences of defaulting on gold loan vary from one case to another case. Even the action taken on the borrowers who default on their loan payments vary from one lender to another. While one should never default on their loan payments but in case of such an inevitable situation, you must understand what consequences defaulting on the gold loan will bring.
Your credit score takes a hard hit
A credit score is a 3-digit score that reflects how well or poorly you have dealt with credit (loans or credit cards) in the past. The score is evaluated by the credit bureaus (TransUnion CIBIL, Equifax, Experian, and CRIF High Mark) on the basis of credit information provided by banks and NBFCs throughout the country. This means that any default or delay in a loan payment or credit card bill will bring your credit score down by a certain percentage.
When you apply for a loan or credit card, lenders requests for your credit report (which also includes your credit score) on the basis of which they approve or reject your loan application. An applicant with a low credit score is equivalent to risk which a lender will not readily help. Moreover, if you are a continuous defaulter, lenders might start to consider you as a Non-performing Asset (NPA). The whole incident will not get easily passed with time as it will remain on your credit report for a few years. Even if you get past with a loan, the interest rate levied will be more than the interest rate levied on a good credit profile with good repayment history.
Loan payment reminders become a routine
When you miss paying even a single loan installment, reminder calls will start pouring in till you make the payment. And your lender will try to get in touch with you not just through phone calls but through every possible means of communication that you have registered with them. Basically, they don’t want to give you a reason to say that you didn’t receive the reminder.
Penal interest is imposed
Many lenders even charge penal interest for the time overdue, which is usually over and above the normal interest rate that a borrower pays for a gold loan. The rate at which you will be charged varies from one lender to another. However, it is usually between 1% and 7% per annum.
Lenders may take legal action
Lenders generally allow a single or two slip-ups in making the loan payment. But if the problem continues even after three consecutive months, the borrower has declared a Non-performing Asset (NPA) – a label that bars you from getting any loan in future.
Simultaneously, ignoring constant reminders given by your lenders will set off a chain of events which usually starts with your lender sending you a legal notice at your registered address. The notice communicates the urgency to pay up the outstanding amount soon. It will also inform you of the time within which you will have to clear your debt obligations.
Your collateral gets auctioned
Remember the gold articles that you had pledged at the time of taking a gold loan? Yes, those beautiful gold jewelry and gold coins that you kept safe for years come now into the picture. Non-payment of outstanding balance even by the final notice date puts your gold articles in danger. Auctioning gold is the last resort for lenders to get what they had lent to you with trust. And you cannot argue against it as your lender can lawfully take possession of the collateral and auction it to recover the loan amount.
How can you prevent loan repayment default?
In the above lines, we have painted an entire picture on what would happen in case you default on the gold loan. You have seen the worst, now see how can you convert it into a better situation. If you are stuck in a similar kind of a situation, know that there are ways that can help you get out of the situation. For instance,
- You can communicate the issue with your lender and they might suggest you different ways of paying your EMI on time.
- To reduce the loan EMI, you can request your lender to increase the gold loan tenure.
- You can consider consolidating your debt. But keep in mind that the interest payouts along with the EMIs of the new loan should be lower than that of the original loan.