Common mistakes applicants make while applying for Gold Loans

Gold loan is one of the best and easiest loan options available today. Such loans help you to get financial aid instantly without much hassle. So, if you are willing to apply for a gold loan, you must tread with caution. Here are a few common mistakes that applicants make while getting a loan against gold:

1. Not evaluating the credibility of the lender

While applying for a gold loan, you pledge your gold ornaments to the lender to get the loan. As it is an asset-backed loan, your gold remains with the lender till the time you repay the loan completely. Therefore, the risk is more on you than on the lender. So, before availing this loan, make sure you do a thorough background check on the credibility of the lender/ NBFC through which you are applying. It is always recommended to choose a reputed lender/NBFC only for gold loans. Any entity that is regulated by RBI is always a safer bet for you.

2. Not comparing enough options

Nowadays, almost every lender/ NBFC offers competitive and attractive gold loan proposals to the borrowers. Do not fall for the first option as it may not be ideal for you. So, before finalizing on the available options, it is better for you to compare the multiple lenders/ NBFCs and know about their offers first before filing your online loan application. Make sure to read the fine print before selecting the lender. Try to select a lender/ NBFC that offers you a lower rate of interest or a higher loan to value (LTV) ratio.

3. Not considering the repayment structure

Before considering a loan offer, you should always be clear about the repayment structure. Understanding loan repayment terms will help you to plan your finances in advance and avoid defaults. Your lender may offer four different types of repayment structures, which are given as follows:

  • Regular EMIs: This option of repayment is the most common and basic repayment structure. It is best suited for salaried borrowers who have fixed monthly cash inflow. In this mode, the loan repayment will be made in EMIs, which will include both interest and principal amount.
  • Partial repayment: To maximize the convenience of the customers, lenders also offer the facility to partially repay your loan amount. In this type of repayment structure, borrowers can repay the interest and principal amount as per their convenience. It is best suited for those individuals who are in business. Following this method will help you to save a lot of your interest.
  • Only interest EMI: In this type of gold loan repayment method, lenders allow you to pay only the interest amount as per the EMI schedule and the whole principal amount at the time of maturity. This facility works best for most of the borrowers, as they need to pay only the interest amount and not the whole principal amount during the entire loan tenure. This repayment structure helps borrowers to reduce their EMIs as well.
  • Bullet repayment: As per this repayment structure, a borrower must repay the entire loan amount along with the interest as well as the principal amount when the loan matures. Borrowers do not need to pay any EMIs in this case, only the interest will be calculated each month. The interest and principal amount need to be repaid when the loan gets matured.

4. Not aware about LTV (Loan-To-Value) ratio calculation

LTV is known as the loan-to-value ratio. Creditors use this ratio to calculate the value of your gold, based on which they fund you the loan amount which should range between 75%-77% of its total value. Always remember, the higher the LTV, the higher will be the risk involved. So, to get the maximum loan amount, borrowers must also consider the LTV ratio before opting for a gold loan.

5. Not knowing about the gold that you are pledging

Usually, lenders grant loans on your gold jewelry which has a purity of 18-22 karat or above. Further, gold coins, bars, biscuits, utensils are not accepted as collateral to get the loan. Also, if the jewelry you are pledging with the lender 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.

6. Not Knowing about the hidden charges

Some of the financial institutions often hide a lot of charges in their ‘Terms and Conditions’ section. The hidden charges include processing fee, foreclosure charges, penal charges on late payment, and auction-related charges. So, before applying for a gold loan, always try to know about all these hidden charges before signing your loan application.

7. Being unaware of auction terms

If you are unable to repay your loan on time, your gold will be up for auction. Your lender will be entitled to auction (sell) your gold in the market to realize the entire loan amount. So, try to discuss the auction terms clearly with your lender and ask about the penal charges associated with it.

8. Not considering after-sales service

Most of the borrowers neglects after-sales service while applying for a gold loan. It is also one of the most important things which you need to consider. Therefore, you should always choose such lenders or gold loan companies which have a proven track record of friendly customer service. It will help you to avail a loan in a hassle-free manner while giving you mental peace.

Bottom Line

As a borrower, be aware of not committing such common mistakes while applying for a gold loan. Always take an informed decision by doing extensive research about the loan and every relevant detail about it.