In India, gold is not only considered to be auspicious, but it is also perceived as a hedge against risky events. There are many who prefer to pledge gold and take a loan rather than selling the precious metal during times when funds are needed. The gold loan market is estimated to grow by Rs. 3,101 billion by 2020.
Loan against gold has become very common and it is also advertised a lot. It has become very easy to get a gold loan due to which you might make a mistake while applying for one. Let us have a look at some of the mistakes that you must avoid while making an application for a gold loan.
1. Not Assessing the Credibility of the Lender
When you take cash for gold, what you are doing is giving your gold to a lender and receive an amount based on the valuation. In this asset-backed loan, your gold will remain with the lender until you make the entire repayment.
Before taking a loan against gold from any lender, check for the credibility for that particular lender. Make comparisons between other lenders that are available online. You can make use of the services of web aggregators to compare lenders on various factors such as processing fees and annual interest rates.
2. Not Checking Enough Options
There are several lenders ready to provide cash for gold with different propositions for the borrowers. Before you make a final choice, you should look for all the options available in the market for a loan against gold. Every lender out there has an attractive and competitive proposal for gold loans. You must go through all the terms before selecting any lender.
Research should be the primary tool for selection as you are the borrower. Speak with as many lenders as possible and then compare their offerings based on Loan to Value Ratio (LVT) and rate of interest. Shortlist among all the lenders after analyzing everything. Make a final choice as per the best offering that you are receiving based on your requirements.
3. Not Knowing about your Gold
You can get cash for gold from gold loan lenders for all the gold jewellery that has a purity of 22 karat and more. Most of the financial institutions and banks do not accept bullion, gold bars, or gold coins that are above 50 gms to be collateral. If you have jewellery that is studded with gemstones, then you must know that the value of gemstones is not considered.
Before you make an application for gold loan, you must know its valuation and purity so that there are no problems raised after that.
4. Not knowing the nuances of LTV on gold loans
When you apply for a gold loan, it might happen that you would not receive the entire value of gold as the loan amount. As per the rule set up by the Reserve Bank of India, the ratio of Loan to Value (LTV) in gold loan should not be more than 75%.
For example, if your gold values Rs. 10,000, then you can get a gold loan of up to a maximum Rs. 7500. This ratio will determine the loan amount that you can receive against your gold.
There are different parameters set up by different lending institutions in order to reach this ratio. As you are a borrower you must know the calculation used by the lender for assigning the LTV ratio.
5. Not Understanding EMI Options
Gold loans are not only easier to get, but they are also a secured form of lending due to which sometimes the lenders offer the benefit of different repayment structures to the borrowers.
Regular EMI
If you are a salaried employee, then this is the perfect option for you where there will be a month-on-month repayment structure.
Partial Repayment
This is a customized repayment structure where you repay a lump sum amount at the initial stage to lower the burden of the interest rate. It is an ideal structure for business owners.
Only Interest EMI
It is a customized repayment option where you pay the principal amount fully and then pay the interest amount in EMIs. It is an ideal structure if you are sure that you will be receiving a bulk amount that will help you in paying the principal amount.
Bullet Repayment
In this method, the interest amount is calculated every month on the loan amount. You can choose to not pay the EMI during the tenure of your loan. You can repay the interest and the entire amount during maturity. It is an ideal option if you have the irregular cash flow for a certain period and then the cash flow is resumed to be regular.