A gold loan is a favourite way of raising funds in India. In a gold loan, gold ornaments are put up as collateral against the loan. These loans are short-term loans with flexible tenure. Most lenders require regular servicing of interest, and principal can be repaid at the end of the mandate. Depending upon the loan agreement, a loan against gold is given out.
There are many takers for a gold loan in India . Since many people own gold, a credit against gold is a guaranteed way to raise money in case of needs. Banks and Non-Banking Financial Companies (NBFC) both offer gold loans.
There are a few important things to remember so that you avoid making mistakes while applying for a gold loan. These pointers make a lot of difference when it comes to repayment.
Following are 5 mistakes to avoid while applying for a gold loan:
1. Opting for a loan with the higher interest rate to get a higher loan amount:
One important term while applying for a gold loan is LTV Ratio or Loan to Value ratio. Most lenders follow an LTV of 65-75% while giving out a gold loan. This means 65-75% of the market value of the gold is the loan amount disbursed. Some lenders may offer a higher LTV at higher interest rates. Be careful of such schemes from lenders, as the interest rate can be a burden.
2. Not knowing different charges such as interest rate, hidden charges:
The interest rate on a gold loan may come with terms and conditions. When applying for a gold loan, check all the terms and conditions. There may be hidden charges such as processing fees, penalties, prepayment charges, late payment charges. You can take a better decision about the gold loan once you know these charges.
3. Not checking the Repayment schedule:
Depending on the lender, the repayment schedule will change. Some lenders require interest to be paid monthly and the principal amount to be paid all at once. Some lenders take repayment in the form of EMI. Not checking the schedule will lead to problems if you can’t service the gold loan.
4. Checking the creditworthiness of the lender:
There may be many lenders offering gold loans, but before you apply for a loan against gold, it is better to check whether the lender is reputed in the market. During the loan tenure, your gold will be with the lender. This is why the lender should be trustworthy.
5. Checking the quality of gold needed to put up for the loan:
The quality of gold that each lender requires is different. Some give loans only for 22-c arat gold; some provide loans for 18-22 c arat gold.