Gold loan is the emerging and popular loan nowadays. Gold was traditionally considered as a savings instrument. Now people opt for a gold loan for increasing their credit score. The gold loan has low-interest rates and is easy to repay, repaying the loans on time will automatically increase your CIBIL score. When people want funds for their financial struggles and they have gold ornaments, gold loan is the best option to resolve their crisis.
Gold loan is a secured loan where you can pledge your gold ornaments (which will act as collateral) and get a loan against it. There are many banks and NBFC’s offer gold loans to their customers. Gold loan is one of the best loans because of its minimal documentation, quick processing and instant cash disbursal.
However, here are a few mistakes which you should avoid before taking a gold loan:
Not checking the lender’s credibility:
When compared to other loans, gold loan is easy to avail and has quick disbursal. Your eligibility and credit score doesn’t matter when you apply for a gold loan. But the gold which is offered as collateral should be safe. You should be very sure about which bank or NBFC you choose to get a gold loan from. Only after thorough research, you should choose the final lender. Always look for a lender who will offer you a lower interest rate or high loan to value (LTV) ratio.
Not comparing your options:
Gold loan is given depending upon the amount of gold you pledge and its current market price. A gold loan might be needed for any individual depending upon their requirement. Depending upon your situation, find the option which best suits you. When you start looking up for bank and other financial institutions, you should minimize your search to certain criteria which will help you in filtering easily.
Selecting the wrong tenure:
The time period which you take to repay your loan is known as loan tenure. Usually, the tenure for a gold loan varies from months to years. You should make sure to choose a tenure which best suits you. People feel that having a longer tenure will take off a burden from our shoulders. But making sure how the interest rate is calculated will help you choose a tenure. Optimal choosing of tenure is important so that you can wisely calculate your monthly budget and repayment capacity.
Not knowing about the hidden charges:
Most commonly the banks and NBFC’s offering gold loan doesn’t straight away give the processing charges. It will be given in the Terms and Conditions mentioned like processing fees, foreclosure charge, late payment or whatsoever. So make sure to read all that and compare your lender according to this to be sure you aren’t paying any additional charges.
Being unaware of auction terms:
Many people aren’t aware that when you don’t repay your loan on time, the gold will be auctioned. The company in which you pledge your gold has the sole right to auction your gold ornament. Ensure to discuss with them about all the auction terms clearly before you take a loan from the lender. Make sure to ask them to give you prior intimation or formal notice before auctioning. You might also want to discuss with them if you can renew the loan when the period ends or apply for loan transfer with some other lenders.
Choosing a high-interest rate to get high LTV:
LTV (Loan To Value) is the ratio which depends upon the net worth of your gold ornament to the current market price. RBI has guidelines for a maximum of 75% LTV to both banks and other financial institutions. When you do research make sure to choose financial institutions which offer you high LTV with lower interest rates. When you choose the one which has higher LTV it will involve having higher risk factors. So depending upon the current market value of the gold your LTV ratio will be calculated.
Not knowing how the interest rate is calculated:
Banks and NBFC’s often claim they are offering very low-interest rates compared to others. Some companies will charge a sudden increase in interest rate if you miss a monthly payment. So you should thoroughly check their terms and conditions before applying for the loan. Make sure to check how the interest rates are calculated and if it’s a fixed or floating interest rate.
Not knowing about pre-payment charges:
Usually, lenders don’t charge for pre-payment fees for gold loan. But some financial institutions will charge up to 2.5% if you repay the loan before the tenure. Most people will think about repaying the loan when they have enough amount to cut short the interest costs, but you should make sure if your lender charges for it or not.
Not seeing the repayment options:
When you are looking for a gold loan make sure to talk to your lender about the repayment options which they offer. Understanding the repayment options will give you an idea on how you can manage your other finances and repay the loan without any fuss. Here are some of the repayment options which you can get:
When you are a salaried employee and you have a fixed cash flow, then this option is the best for you. You can pay monthly EMIs for both the principal amount and the interest.
A partial repayment is an option where you can pay the principal and interest rate depending upon your convenience. There will not be any fixed schedule for your repayment. This will suit people who have seasonal businesses where you will earn only during a certain period of time. In this, you can repay the loan amount in bulk when you have money and lower your interest rate for the future.
Only Interest EMI:
With this option, you will only repay the interest during the tenure as EMI and pay the principal amount fully when your loan matures. This is best known for people who are waiting for a bulk sum which they will receive from a deposit or some other source.
In this method, you can repay the full amount along with the principal at the end of the loan tenure. The monthly income for each month will be calculated together and you can pay the total at the end of your loan tenure.
Depending upon your repayment capacity and your financial requirements, you can choose the repayment option which will best suit you.
When you avoid all the above mistakes, then a gold loan is the best option for you. The gold loan has quick processing and fast disbursal which makes it the best option for your sudden financial needs.