Gold loans may appear to be a simple way to raise quick money. You typically rely on the power of gold when you require quick cash for a wedding, a festival, or travel. Gold, which is typically preserved as jewelry, frequently saves the day in times of need. You can monetize your gold holdings without actually selling them in the markets thanks to the frenzied competition among banks and NBFCs to provide gold loans to Indian families. However, when choosing a gold loan, many consumers make some basic errors. Here are some typical mistakes you should steer clear of when taking out a gold loan.
Not evaluating the credibility of the lender
You provide the lender with a pledge of your gold jewelry when you apply for a gold loan in order to receive funding. Since the loan is secured by your gold, it stays with the lender until it is fully repaid. As a result, you bear more of the risk than the lender. Make sure you thoroughly research the reputation of the lender or NBFC through which you are applying before taking out this loan. It is usually advised to only select a reputable lender or NBFC for gold loans. Any company that is under RBI regulation is always a better choice for you.
Not comparing enough options
Nowadays, practically all lenders and NBFCs present clients with competitive and alluring gold loan propositions. Avoid choosing the first one because it could not be the best for you. Therefore, it is best for you to evaluate the various lenders/NBFCs and learn about their offerings before submitting your online loan application in order to make a final decision on the possibilities that are accessible. Before choosing the lender, make sure to read the fine print. Consider choosing a lender or NBFC that provides you with a lower gold loan interest rate or a higher loan-to-value (LTV) ratio.
Not considering the repayment structure
You should carefully understand the repayment terms before deciding whether to accept a loan offer. Knowing the terms of your loan repayment will make it easier for you to budget your money ahead of time and prevent defaults. Four distinct repayment structures, which are listed below, may be provided by your lender:
Regular EMI
The most typical and fundamental repayment structure is this one. It works best for salaried borrowers who receive a predictable monthly income flow. In this repayment option, the loan will be repaid in EMIs that comprise both the interest and the principal.
Partial repayment
Lenders often provide the option to pay back a portion of your loan amount, maximizing client convenience. Borrowers can choose how much interest and principal to pay back under this sort of repayment scheme. It is most appropriate for those who are in business. You will save a lot of interest if you use this strategy.
Only interest EMI
Lenders permit you to pay only the interest amount as per the EMI schedule and the entire principal amount at the time of maturity when repaying this type of gold loan. Most borrowers find that this option works best for them because they only have to pay the interest for the full loan term, not the total principal. Additionally, this repayment plan assists borrowers in lowering their EMIs.
Bullet repayment
According to this method of repayment, when a loan matures, the borrower is required to pay back the entire loan amount, including interest and principal. Only the interest will be calculated each month in this scenario; borrowers are not required to make any EMI payments. When the loan matures, the principal and interest must be paid back.
Not aware of the loan-to-value ratio
LTV, or loan-to-value ratio, stands for this. This ratio is used by creditors to determine the value of your gold, on which they base the loan amount, which should be in the range of 75%–77% of the gold’s entire value. Always keep in mind that the danger will increase as the LTV increases. Therefore, when choosing a gold loan, borrowers must also take the LTV ratio into account in order to receive the highest loan amount.
Not knowing about hidden charges
Many fees are frequently concealed by some financial institutions in their “Terms and Conditions” section. Processing fees, foreclosure fees, late payment penalties, and fees associated with auctions are a few of the hidden costs. Therefore, before signing your loan application and applying for a gold loan, always try to learn about all these hidden fees.
Being unaware of auction terms
Your gold will be put up for auction if you are unable to pay back your loan on time. To recover the full loan amount, your lender will be allowed to auction (sell) your gold in the market. Therefore, make an effort to explain the conditions of the auction to your lender and inquire about any connected penalties.
Not knowing about the gold you are pledging
Lenders typically approve loans for gold jewelry with a purity of 18 to 22 karats or higher. Additionally, gold coins, bars, biscuits, and utensils are not accepted as collateral for loans. Additionally, the value of any gemstones that are set in the jewelry that you are guaranteeing to the lender is not taken into account. Therefore, it’s crucial to understand your gold, its purity, and its value before you apply for a loan against it.
Bottom line
Be mindful as a borrower not to make these typical errors while applying for a gold loan. Always make informed decisions by thoroughly researching the loan and all relevant data about it.
