- Date : 27/01/2020
- Read: 5 mins
Gold loans help you get financial aid at times of emergency. Avoid these commonly made mistakes when applying for one.
In India, gold is not only considered auspicious, but it is also a reserve for a rainy day. With Indians increasingly resorting to gold loans in times of financial emergencies, the organised gold loan market in India is estimated to grow to Rs. 3,101 billion by 2020 at a CAGR of 13.7 per cent. While gold loans are easily available and widely advertised today, it is easy to falter while applying for one. Here are top five mistakes to avoid while making a gold loan application.
1. Not assessing the credibility of the lender:
When you take a gold loan, you essentially pledge your gold to a lender for an amount based on its valuation. As an asset-backed loan, your gold remains with the lender until complete repayment. Check the credibility of the lender and make comparisons on lenders online. You can use the services of web aggregators to compare lenders on factors such as the annual interest rate and processing fees.
2. Not checking out enough options:
There are various lenders willing to give you a gold loan today and each one has a different proposition for borrowers. While checking out gold loan options, it is wise to check all options before making a final choice. Almost every lender has a competitive and attractive gold loan proposal; ensure you read through the fine print before you select the lender of your choice. As a borrower, you may want to make research your primary selection tool. Speak to as many lenders as you can and compare their offerings based on the rate of interest and Loan to Value ratio (LTV), and arrive at a shortlist. You can then make a final choice based on the best offer depending on your requirement.
3. Not knowing your gold:
Gold loan lenders grant loans on gold jewellery with a purity of 22 karat and above. Further, gold bars, bullion or gold coins above 50 gms are not accepted as collateral by banks and financial institutions. Also, if the jewellery you are pledging is studded with gemstones, the value of the gemstones is not taken into consideration. Thus, it is important to know your gold, its purity and valuation before you make an application for a loan against it.
4. Not knowing the nuances of LTV on your gold loan:
When you apply for a gold loan, you may not get the full value of gold as the loan amount. As per the Reserve Bank of India rule, the loan-to-value (LTV) ratio of a gold loan cannot exceed 75%. For instance, if the value of your gold is Rs. 1 lakh you can get a loan of up to a maximum of Rs. 75,000. This ratio determines the amount of loan you can get against your gold. Different lending institutions use different parameters to arrive at this ratio. As a borrower, you must know what goes into the calculation of the LTV ratio of the lender.
5. Not understanding EMI options:
Gold loans are not only easier to get, as they are a secured form of lending, lenders often offer the benefits of different repayment structures to their borrowers. Here are four repayment structures to consider.
Regular EMI – Basic month-on-month repayment structure. This is an option best suited for you if you are a salaried employee with fixed cash flow.
Partial repayment- Customised EMI structure; where you repay the principal amount initially to reduce the interest burden. This EMI option is ideal for business owners. If you are a business owner, you may find it convenient to repay a lump sum at the beginning of the loan tenure to reduce interest rate burden later.
Only interest EMI- Customised repayment option, where you can pay the interest as EMI only and pay the principal amount in full (coinciding it with the maturity of some other investment option). You can consider this option if you are sure you will receive a bulk amount (from the maturity of an investment you made earlier) that coincides with the conclusion of your loan tenure.
Bullet repayment- Here, the interest is calculated on the loan amount every month, but you can choose not to pay the EMI during the loan tenure. Instead, you repay the whole amount along with interest during maturity. You can consider this option if your cash flows are uncertain for a temporary period but are certain to resume at a time that coincides with the end of your loan.
You can choose from any of the above repayment structures after careful consideration depending on the lender’s terms and conditions.
The last word
Once you have arrived on the choice of a lender, make sure to read the terms and conditions of the loan, to ensure there are no future, unpleasant surprises. A gold loan can indeed be helpful, during a financial emergency, only if you are assured you are keeping your gold in good hands.