Loans against gold have recently found favour among Indian consumers, especially smaller businesses that faced a tremendous economic slump in 2020. Collateralising household gold items is the simplest way to acquire capital for many such enterprises and at a personal level.
As per RBI reports, by the end of FY2021, the total outstanding gold loan value amounted to around Rs. 60,500 crore. This figure represented year-on-year growth of almost 82%.
Nevertheless, blindly opting for such credit can cause unnecessary financial strain on borrowers. Therefore, learning about some of the common mistakes to avoid before applying for the loan can help individuals to optimise benefits.
7 mistakes to Avoid While Applying for a Gold Loan
If one is considering a gold loan, here are some things to avoid, ensuring the best borrowing experience.
- Failing to compare offers from various lenders
Not comparing between lenders is one of the most common mistakes while applying for a gold loan, or any other credit for that matter. Doing so would mean that a borrower may miss out on more favourable terms available on gold loans in the current market.
Therefore, applicants must check all available options beforehand to make an informed decision. One must look at tenor flexibility, the interest rate charged and repayment options when undertaking such a gold loan in India comparisons.
- Not reading or failure to comprehend loan terms and conditions
Every loan comes with a specific fine print, and borrowers must be responsible enough to read such terms and conditions before signing the loan documents. Gold loans are no different in this aspect.
For instance, borrowers can check whether a gold loan offer extends part payment and part release facility or not. In case of part payment, it may entail bearing an additional charge. Additionally, it is vital to check the terms associated with part release facility.
- Neglecting various gold loan repayment options
Unlike most other consumer credit, gold loans offer increased flexibility when it comes to repayment. Borrowers have three major methods to repay, and these are –
- The gold loan process is such that individuals can choose to avoid EMI payments completely. A borrower can repay the entire principal amount along with the accrued interest through a single payment at the end of the loan tenor.
- Under the regular EMI method, individuals repay gold loans through monthly instalments.
- Here, one just pays the accrued interest amount each month. The outstanding principal sum is cleared at the end of this loan’s tenor through a single payment.
Depending on one’s financial viability, determining the optimal repayment option is crucial. Moreover, not considering in advance can create issues in future.
- Failing to choose a lender with door-step service
Due to the inherent value of gold jewellery, carrying the same to a lender’s branch is a risky prospect. Thus, several renowned lenders like Bajaj Finserv offers door-step gold assessment and recovery. In such cases, the gold loan process involves applying for the said credit, followed by a visit from a representative from the lending institution.
This representative assesses a borrower’s collateralised gold items and approves a loan amount based on their value. This is an easier alternative, which minimises risk to one’s gold items.
- Failing to assess gold loan LTV
Loan to value refers to the maximum loan amount one can acquire against the total valuation of pledged gold items. As per the current RBI guidelines, this ratio, represented in percentage, now stands at a maximum of 75%. This means, if you collateralise gold items of Rs.10 lakh against an LTV of 70%, you can get a loan of up to Rs. 7 lakh.
However, a point to remember here is that this ratio alters with the choice of lender. Hence, one should not make the mistake of not checking this ratio and ending up with a lender offering an LTV that does not meet his/her requirements.
- Failure to assess gold purity
Lenders do not accept gold jewellery whose purity is lower than 18 carats. Thus, individuals while purchasing gold articles must get its purity certificates, to avoid any future hassle. The inability to comprehend such rules can lead to a rejection of loan application or increased hassle when applying for these kinds of credit.
- Not learning about the auction process in case of delinquencies
Being secured loans, lenders are free to auction one’s collateralised gold items if borrowers fail to repay the said credit on time. Before signing on for such credits, borrowers must understand this auction process carefully. Failure to do so can lead to the loss of valuable assets.
Gold loans ensure accelerated access to funds during financial emergencies. Keeping the above-listed common mistakes in mind should ensure a streamlined borrowing process for loan applicants.