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Gold loan is one of the best and easiest loan options available today. Such loans help you to get financial aid instantly without much hassle. So, if you are willing to apply for a gold loan, you must tread with caution.
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:
Companies often market their schemes to show optically low interest rates. Subject to terms and conditions your might end up paying a significant higher interest. Some companies charge Jumping interest rate, where your interest jumps with passage of time or on missing your monthly interest payment. Thus as much as possible choose schemes which offer Fixed or Constant interest rates. In all cases check how your interest will be actually calculated.
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.
Some of the financial institutions often hide a lot of charges in their ‘Terms and Conditions’ section. The hidden charges include processing fee, foreclosure charges, penal charges on late payment, and auction-related charges. So, before applying for a gold loan, always try to know about all these hidden charges before signing your loan application.
At least 90% of the customers don’t read the terms and conditions written in small font, containing numerous clauses regarding the gold loan (for that matter any loan). Rather, they will sign the document blindly, so as not to waste time reading it completely. This may cause you to pay an extra amount as interest. Some of the gold loans may have an increasing type of rate of interest, i.e. the interest rate may go to the next slab after a certain period. Of course, trustworthy finance companies will brief the customer about the gold loan plans. So that he or she can choose the best one.
Not knowing about applying for a gold loan from LTV (loan-to-value). You have to bear that in mind when asking for a gold loan because you do not get the full value of gold as the cost of the loan. As per the RBI concept, a gold loan’s LTV ratio may not exceed 75 percent. For example, you can get a loan of the subject to a limit of Rs 1, 50,000 if the value of your gold is Rs. 2 lakh. The sum you can do it against your gold ornament is determined by this ratio. As a borrower, different banks / NBFCs use different criteria to calculate; you need to understand what goes into the lender’s LTV ratio measurement.
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.
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.