One of the greatest lending alternatives available today is a gold loan. Why? Firstly, since it is simple to obtain. Such loans enable you to obtain financial assistance in a timely and hassle-free manner. One of the reasons why the gold loan market has remained popular among the public for so long is because of this. Aside from banks, a number of non-bank financial institutions (NBFIs) have begun to focus on this market. While the benefits of a gold loan are numerous, consumers must exercise prudence while applying for one.
Few pitfalls to avoid while taking a Gold Loan
1. Choosing High-Interest Rate Schemes
Loan to Value ratio or LTV is the amount of loan against the gold you can avail on the value of the gold you possess. The value of gold is determined based on the rate of gold in the market. The maximum LTV allowed by RBI is 75%. Gold finance companies often offer you a higher LTV for a higher rate of interest. Do not fall for this trap. Always prefer a lower rate of interest over a higher loan to value ratio. A higher rate of interest rate will make the repayment tough in the long-run. You can use a gold loan calculator online to know about the LTV offered on gold value.
2. Not looking at sufficient options
You have to bear that in mind when asking for a gold loan because you do not get the full value of gold as the cost of the loan. As per the RBI concept, a gold loan’s LTV ratio may not exceed 75 percent. For example, you can get a loan of the subject to a limit of Rs 1, 50,000 if the value of your gold is Rs. 2 lakh. The sum you can do it against your gold ornament is determined by this ratio. As a borrower, different banks / NBFCs use different criteria to calculate; you need to understand what goes into the lender’s LTV ratio measurement.
3. Not assessing the Lender’s Reputation
You basically pledge your gold to a lender for a sum dependent on its value, when you take a gold loan. As a loan supported by a profit, the gold stays with the lender until full repayment. Check the lender’s reputation and compare lenders online. To compare lenders with factors such as the annual gold loan interest rate and processing costs, you can use the online services portal.
4. Not considering the Repayment Structure
When considering a loan offer, customers should always talk about the repayment structure with their creditors. Understanding loan repayment terms will help them plan their finances in advance and avoid defaults. Here are 4 separate ways to repay your gold loan
- Daily EMI Possibility
- Make Payments in Part
- Bullet Refunds
- Paying interest later as EMI & Principal
5. Ignoring Hidden Charges
Ignoring hidden charges associated with taking a loan against gold can prove to be costly in the long run. Common charges include processing fee, appraisal fee, foreclosure charges, penal charges on late payment, and auction-related charges. These hidden charges are often layered within the terms and conditions, and you should always factor in these charges before you settle down for the final agreement.
6. Being unaware of the quality of gold that qualifies for Loan
When pledging gold ornaments, ensure that it qualifies the minimum purity criteria. Creditors approve loans only on gold objects that exhibit the purity of 18 – 22 carat or above. In addition to this, if the ornaments have precious gems studded in the design, they will not be considered to decide the loan value. Only the weight and purity of the gold will be the deciding factor of the loan value.
7. Wrong Tenure of Repayment
Choosing a longer tenure for a higher interest is one of the worst mistakes you can make while taking a gold loan. The absolute value of the monthly EMIs might look smaller when you increase the tenure, but the eventual interest you end up paying is much higher than what you had planned initially. You can calculate the right amount of EMI for the right tenure of repayment using a gold loan calculator online.