Gold loans may look like a straight forward method of raising quick money. Whether you need urgent funds for a marriage or festivals or for travel, you normally tend to fall back upon the power of gold. Gold, usually kept in the form of jewellery, often comes to the rescue during financial emergencies. With banks and NBFCs falling over each other to give gold loans to Indian households, you can monetize your gold assets without really selling them in the markets. However, quite often people make some fundamental mistakes while opting for a gold loan. Here are some common mistakes you need to avoid while taking a gold loan.
Common mistakes to avoid while taking a gold loan
A major blunder people do commit is not checking the lender’s credibility. In a gold loan you have the cash, which is a fraction of the gold that you have pledged. Therefore the risk is more on you than on the lender. You must therefore ensure to do a background check on the lender before taking a loan. Gold loan can be risky for the borrower as your gold is with the lender till the time you repay your loan completely. Making it a point to choose a well established and reputed bank or NBFCs only for gold loans. Any entity that is regulated by the RBI is always a better bet for you.
You would be making mistake by not comparing gold loans in the market. When you compare, you can use any of the aggregator websites. But make it a point on the patent costs and the latent costs. 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. The more you snoop around, the better the offers you find. In fact if you approach the bank with this comparative study, the bank will be forced to go that extra mile and work out a better deal for you. Look for lender who offers a lower rate of interest or a higher loan to value (LTV) ratio.
Another common mistake you need to avoid is being negligent of the repayment structure: It is extremely important to understand these structures and select the one that best matches your needs. Be clear whether you are paying in the form of regular EMIs, bullet payments, or as interest-only repayment. Ensure that you have the requisite liquidity with you when the loan repayment comes up. Else you could lose your gold. Check your inflows to conform that you can afford the EMI costs.
When it comes to gold loans the devil lies in the details. So get into the finer aspects of Loan to Value (LTV) calculation. Why is this important? Borrowers must 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 5 lakh, you can get a loan for up to Rs 3 lakh. As a smart borrower, you need to have a good idea about the market value of your gold. Be clear on which benchmark price they are using and how they are arriving at the current value. Quite often, these are flexible.
Not understanding gold is like not understanding the gold loan at all. You must remember that banks grant loans on gold with purity of 22 karat or above. So if you have gold which is any less pure, either the quantity will be reduced to lower grams or the loan may be rejected. In case you are pledging a diamond necklace, only the weight and purity of the gold will be considered for deciding the loan value. The value of gemstones is normally not to 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. While gold coins are accepted, any gold coin above 50 grams is normally accepted as collateral.
Finally, you must read the fine print. What are the conditions in which your bank can possess the gold and auction it? What are the conditions in which you can close the loan without any prepayment charges? Discuss all these aspects threadbare before signing on the dotted line.
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