Loans against gold in India gained momentum and registered a y-o-y growth of almost 132% to reach Rs. 43,141 crore in January 2021, compared to the previous year. Almost every Indian household possess some amount of gold, and they often fall back on monetising the gold they own to raise funds during a cash crunch.
A gold loan allows borrowers to access instant credit to address any number of financial emergencies. Additionally, being an asset-based credit, the interest rates and eligibility of these loans are also lenient compared to unsecured loans. Nonetheless, owing to a lack of knowledge, individuals often repay more than they borrow.
Therefore, individuals should know about some common mistakes that gold loan borrowers make before applying for the credits.
Common mistakes to avoid while opting for a gold loan
Following are a few mistakes that are common while opting for a gold loan.
1. Not determining the exact requirement
Before availing a gold loan, individuals need to decide the exact credit requirement. It helps in borrowing the right loan amount. While an individual may possess a substantial amount of gold jewellery, it does not mean he/she will need to opt for a high loan value.
Borrowers need to estimate their exact requirements and apply accordingly to prevent overburdening their finances.
2. Not comparing interest rates
Like other debts, the interest rate determines the borrowing cost of a gold loan. Moreover, depending on the risk assessment of applicants, the interest rates may vary. Typically, the interest rates depend on various other factors like:
- Loan to Value (LTV)
- Gold purity
- Gold quantity
For instance, RBI announced a cap on gold loan LTV of 75%. It allows individuals to access a sizeable loan amount which is almost 75% of the current value of the gold pledged. However, lenders levy higher interest rates on gold loans with higher LTV.
Moreover, the purity of gold pledged also influences gold loan interest rates. Usually, most lenders accept gold jewellery of 18 carats to up to 24 carats. Higher the carat, lower the interest rates.
The type of interest rate chosen also influences the rate’s value. While some lenders offer gold loans at fixed interest rates, others offer floating interest rates. Note that floating interest rates are typically lower than fixed interest rates. However, to avail of the best gold loan scheme, borrowers need to compare different lenders.
3. Not checking lender’s credibility
Since this precious metal holds high value, you need to consider the credibility of a lender before pledging the gold. In this regard, you need to consider the measures the lender adopts to ensure your gold’s security.
Select lenders also offer complementary gold insurance plans which financially protect the pledged items from misplacement and theft.
4. Neglecting loan processing time
Individuals usually resort to a gold loan due to its prompt processing time. Although the gold loan process takes a minimal time to complete, it varies with different lenders. Therefore, borrowers planning to opt for a gold loan to mitigate any financial emergency should know the loan processing time beforehand to make the procedure hassle-free.
5. Ignoring processing fees
Conventionally, you need to pay a processing fee while opting for a gold loan that ranges from 0.10% to 2% of the loan amount. Although it is a one-time payment, it can cost you significantly. Therefore, before choosing a gold loan, you should look for lenders levying the lowest processing fee.
6. Not knowing part-prepayment and foreclosure charges
Part-prepayment reduces the interest burden of any credit product, including a gold loan. However, lenders often impose certain part-prepayment and foreclosing charges when you opt for this facility.
Thankfully, NBFCs like Bajaj Finserv extends a high-value gold loan at competitive interest rates. They also do not levy any part-prepayment and foreclosure charges.
It allows you to make part-prepayment as and when you have surplus without paying hefty additional charges.
7. Not factoring in repayment options
The repayment structure of a gold loan is different from other loan products. Commonly, lenders offer three repayment options to choose from. These include:
- Regular EMIs: It is the conventional method of repaying a gold loan. You need to pay fixed monthly instalments comprising both interest and principal components.
- Partial payment: Under this system, you can repay the interest periodically and choose to settle the principal at the tenor’s end. It saves you from paying regular EMIs.
- Interest-only payment: With this repayment option, you can settle the entire interest component upfront and repay the principal later during the tenor.
Gold loans are one of the least risky modes of acquiring funds. In India, people have gold readily available, making it a highly liquid asset that they can use to fund any personal or unplanned emergency expense.
These are some common mistakes committed while opting for a gold loan. If prospective borrowers can keep these aspects in mind, they can make the most of this credit facility during a liquidity crunch without selling their assets.