India in earlier times was known as ‘Sone ki Chidiya’ (golden bird) due to the presence of an abundance of gold in the country. Gold is kept in a form of jewellery because men and women of India love to wear the jewellery. The trend started changing a few years ago when people were considering gold as an investment. These days the trend has become that people have started using gold as a credit instrument. Gold loan is the easiest option as you can get the cash quickly within no time in case of an emergency. The gold loan market is estimated to grow to Rs. 3,101 billion by 2020 at a CAGR of 13.7 per cent. While the process is simple and hassle-free to avail a gold loan but sometimes borrowers make some common mistakes while applying for a gold loan. Here are the 6 common mistakes discussed in detail:-
1. Choosing High-Interest Rate Schemes To Get High LTV
The gold loan amount is decided by the per gram rate of gold which is in the market. As per the Reserve Bank of India rules, a maximum of 75 percent of LTV (Loan to Value ratio) is allowed on gold loan. Though the LTV differs from bank to bank. Some people may get attracted to a scheme where lenders provide more LTV by offering a higher rate of interest. Don’t get into such a trap, as it will be a burden for you later on. Higher rate of interest means higher EMIs, always chose a scheme which provides a lower interest rate.
2. Not Knowing The Interest Rate Calculation
It is important that a borrower should know how his interest rate is calculated so that a borrower does not end up paying a higher interest rate. Some companies charges jumping interest rate, which means if a borrower defaults to pay an EMI then the interest rate gets higher. It is advised to opt for a loan scheme where the interest remains constant and there are no such hidden rates involved.
3. Choosing Wrong Repayment Mode
Be wise enough to select the right repayment method which suits your need. There are two options to repay the amount, 1. by paying EMIs to bank and 2. Monthly interest to NBCFs. Banks charge a penalty when EMI is not paid on time and NBCFs may end up asking for the higher gold loan interest rate in case of default.
4. Not Knowing The Hidden Charges
Always read the terms and conditions carefully, financial institutions often hide the common charges like processing fee, appraisal fee, foreclosure charges, penal charges on late payment, and auction-related charges. When you decide the loan amount always keep in mind about such charges which may come as a surprise later on. Choose a lender who is transparent in his loan scheme.
5. Selecting The Wrong Tenure
In gold loan tenure range from 3 months to 3 years, so choose a tenure which suits you the best depending on your cash flow situation. There is a myth that longer tenure is a better option but you may end paying more money if you choose a longer tenure. Even a very small tenure like three months can also be a problem for a borrower as it can lead to the auction of jewellery, the best tenure id from 6 months to a year.
6. Being Unaware Of Auction Terms
Gold loan is a secure loan, in which gold jewellery is pledged as collateral which states that if a borrower defaults to repay the amount then the gold will be auctioned. The lender has entitled to gold auction such a case. Whenever you reach a lender for a gold loan should clearly talk about the terms and conditions of the gold and check if there are any charges related to the auction. To save yourself from gold auction, talk to a lender to extend a loan or apply for a personal loan with other financial institutions to repay the gold loan.
Taking an informed decision is very important whenever you go to a lender to avail any type of loan. When you apply for a gold loan be careful with the above-discussed points and you must also consider the after-sale services of a lender. If you are not happy with the services currently then there are chances that you will have a difficult time afterward. Opt for a lender who provides customer friendly services.