Applying for gold loan? Avoid these mistakes while taking gold loan

gold loan

New Delhi: In India, gold is not just used in the form of jewelry, but also kept as a reserve for a rainy day. People in India are the largest consumer of gold after China. They bank on the gold as historically it has given good returns. Also, it helps to hedge against inflation.

Currently, if you want to invest in paper gold, you can do so either through Gold exchange-traded funds (ETFs) or Sovereign Gold Bonds (SGBs). Unlike physical gold, you will not get physical possession of the gold instead you hold it as an investment which can be redeemed when you need it. You can invest in SGBs through banks, Stock Holding Corporation of India, designated post offices, and stock exchanges like NSE and BSE. Another option that people have is a gold loan. Here are a few mistakes that people must avoid while taking a loan against gold-

1. A gold loan is a secured loan, it is protected by collateral. The gold, as collateral, is kept with the lender till the loan amount is paid off. In case of default by the borrower, the lender keeps the collateral. However, it is important to check the credibility of the lender or the creditor. You can do so by dealing with only well-established banks or non-banking financial companies (NBFCs). Also, one can use the web aggregators’ services to compare the lenders.

2. Before finalising the gold loan, it is better to compare the gold loan options in the market first. You can use the aggregator websites as well for this purpose. The lender always tries to offer competitive and attractive gold loan proposals. Make sure to read the fine print before selecting the lender. Try to look for a lender who offers you a lower rate of interest or a higher loan to value (LTV) ratio.

3. You must first understand the gold loan first. Banks or lender grant loans on gold jewelry with a purity of 22 karat and above. Apart from this, gold bars, bullion or gold coins above 50 grams are not acceptable as collaterals by the lenders. In case the jewelry studded with gemstones is pledged for a loan, then the value of the gemstones is not taken into consideration.

4. As per the Reserve Bank of India (RBI) rule, lenders use loan to value (LTV) ratio to calculate the value of your gold and based on that they fund a loan of the amount of up to 75 per cent of its total value.

5. While taking a loan, one should always discuss the repayment structure with his or her lender. Having clarity over this will help you to plan your finances in advance and avoid defaults. There are four different types of repayment structures such as regular EMI, partial repayment, only interest EMI, and bullet repayment.