A gold loan is considered as the best option in the case of a financial crisis. It can be used to meet immediate financial expenses, such as paying for your marriage or medical bills. Moreover, gold loans come with lenient eligibility criteria and minimal documentation. Lenders do not check your credit score also for loan approvals. While gold loan has various perks, when applying for it, people must tread with caution. Here are a few mistakes that you must avoid when applying for a gold loan:
Not comparing your options: It’s important to compare all the lenders to bag the best deal for yourself. Do thorough research about the market trends, talk to different lenders to know about their offers, negotiate with them if possible, and then shortlist a few options. When you decide your options, look for a lender that offers you a gold loan either at a higher LTV or a lower interest rate.
Not checking creditor’s credibility: A gold loan is a secured loan that you take from a lender by pledging your gold ornaments. The bank keeps custody of the gold till the loan is repaid. If you are unable to repay the loan, the lender will have the right to auction off the gold jewelry to recover their money. The borrowers can ensure the security of their gold in one way – sign an agreement with only well-established banks and NBFCs. Even if you’re getting a low-interest rate on loan, do not sign an agreement with banks or companies that do not have a good reputation in the market.
Avoiding LTV Calculation: LTV or Loan-to-Value Ratio is used by creditors to calculate the ratio of a loan to the net worth of an asset. It is used for risk assessment by the creditors. Higher the loan to value ratio of the gold, the higher will be the risk involved and vice-versa. Before approving the loan, lenders calculate the value of your gold, and based on that, they fund a maximum loan of up to 75% of its total value.
Not considering the repayment structure: It’s important to consider the repayment terms as it will help you to plan your finances and avoid defaults. Your creditor may offer the following four types of repayment structures:
Regular EMIs: In this structure, the loan repayment will be made in EMIs, which will include both interest and principal amount. It is the best option for salaried borrowers who have fixed income flow every month.
Only interest EMI: In this structure, you have to pay the interest part as EMI during the loan tenure and principal amount to be paid in full on the date of maturity.Partial repayment: In this type of structure, you are not bound to follow any repayment schedule. This structure is best for business people. If you have surplus money in the initial stage of the loan tenure, you must prepay your loan amount at that time only so that you have to pay less interest amount in the future. Bullet repayment: In this type of structure, you have to repay the loan amount along with the interest part at the end of the loan tenure. You are not required to pay any amount during the loan tenure.
Being unaware of the quality of gold: When pledging gold ornaments, make sure that it qualifies the minimum purity criteria. Creditors approve loans on gold that exhibit the purity of 18 – 22 carat or above. Also, if the ornaments have precious gems studded in the design, then they will not be considered to decide the loan amount. Only the weight and purity of the gold are used to determine the loan value.
Hence, if you are planning to take a gold loan, make sure that you avoid making the above mistakes for easy loan approval.