Indians’ affinity for gold is known to the world. It is one of the largest importers of gold. In India, gold is usually kept in the form of jewellery. Indians not only buy them as an ornament but also as an investment, which they can use anytime to fund their urgent cash requirements. Whether there is a medical emergency, business expansion or any other financial liabilities, gold can be utilised to get loan against it.
Gold loan is one of the best loan options today. Why? Well, primarily because it is easy to acquire. Such loans help you get financial aid in an instant without much trouble. This is also one of the reasons why the gold loan market has remained popular among masses for many years now. Besides banks, various NBFCs too have started focusing on this sector. While gold loan has various perks, when applying for it people must tread with caution. Here are a few mistakes that people must avoid when getting a loan against gold:
- Not checking creditor’s credibility: A gold loan is a secured loan, which implies that it is protected by collateral (gold in this case). This collateral remains with the creditor or lender till the loan amount is completely paid off. In case a borrower defaults, the creditor uses the collateral to regain some or all amount originally owned by the borrower. This is a good way to provide security to a creditor but what about the borrower. What if the creditor turns out to be a fraud? There is only one way to ensure security for borrowers and that is to trade with only well-established banks and NBFCs. Even if you’re getting lucrative interest rates on gold loan, do not trade with companies or banks that do not have a good reputation in the market.
- Not comparing your options: Everyone wants to bag the best gold loan deal. There is no fixed formula to get one as it depends on the borrowers’ requirements. However, one can make sure that they compare all options before signing the dotted line. The first offer that you get may not be ideal for you. Therefore, research as much as you can about market trends; talk with different banks and financial institutions to know about their offers and then shortlist a few good options. When deciding on your options, look for a creditor that offers you loan either with a lower interest rate or a higher loan to value (LTV) ratio.
- Not considering the repayment structure: When considering a loan offer, customers should always talk about the repayment structure with their creditors. Understanding loan repayment terms will help them plan their finances in advance and avoid defaults. Your creditor may offer four different types of repayment structures, which are given as follows:
- Regular EMIs: This is one of the most common and basic repayment structures. It is best suited for salaried borrowers who have fixed monthly cash inflow. In this structure, the loan repayment will be made in EMIs, which will include both interest and principal amount.
- Partial repayment: In this type of structure, borrower can repay the interest and principal amount as per convenience. Borrower is not bound to follow any repayment schedule. This structure is best for those people who are in some sort of business. If you have a good sum of money in the beginning of the loan tenure, you must prepay a portion of your loan amount initially so that you have to bear less interest amount in the future.
- Only interest EMI: In this type of structure, the creditor asks borrower to pay the interest part as EMI and principal amount in full on the set date of maturity. This type of structure is best for borrowers who are waiting for a bulk sum of money, which they will receive when their fixed deposit or recurring deposit account matures.
- Bullet repayment: according to this type of structure, a borrower has to repay the loan amount in full along with the interest at the end of the loan tenure. No amount is required to be paid during the loan tenure. The interest will be calculated monthly but collected in the end.Borrowers must understand about these repayment structures so that they can make an informed decision when they are required to pick one.
- Avoiding LTV Calculation: LTV is an abbreviation for Loan-to-Value Ratio. This term is used by creditors to express the ratio of a loan to the net worth of an asset. Creditors use this ratio for risk assessment. Higher the LTV, higher will be the risk involved. To get maximum amount from creditors, borrowers must consider LTV ratio also. Creditors calculate the value of your gold and based on that they usually fund a loan amount of up to 75% of its total value. For instance, if the market rate of your gold is Rs. 4lakh, then you can expect a loan amount for up to Rs. 3lakh.
- Being unaware of the quality of gold that qualifies for loan: When pledging gold ornaments, ensure that it qualifies the minimum purity criteria. Creditors approve loans only on gold objects that exhibit the purity of 18 – 22 carat or above. In addition to this, if the ornaments have precious gems studded in the design, they will not be considered to decide the loan value. Only the weight and purity of the gold will be the deciding factor of the loan value.
- Being unaware of the form of gold that qualifies for the gold loan: Ornaments tend to have more sentimental value, which may motivate borrowers to repay loan amount on time. Therefore, in India, creditors prefer to take gold ornaments as collateral. Banks neither accept gold bars nor gold bullion for gold loan. You can avail gold loan against gold coins but they must be 99.99% pure with weight not exceeding 50 grams.Besides the points mentioned above, borrowers must also understand loan terms and conditions thoroughly. Most creditors do not charge prepayment penalty on gold loans; so if your lender charges prepayment penalty, negotiate or look for an alternative.