As per a recent report, India’s organized gold loan market is anticipated to grow at a 15.7% annual rate to reach a valuation of Rs.4.61 lakh crore in FY22 from Rs.3.44 lakh crore in FY20. This clearly indicates a steady growing demand for these loans.
This demand looks quite obvious given the fact that a gold loan scheme offers zero end usage restrictions and comes with options like flexible repayment and quick disbursal.
While individuals can make use of an online gold loan to acquire funds for several purposes, there are certain aspects regarding which they should be careful.
Mistakes to avoid while acquiring a gold loan
1. Not checking the credibility of a creditor
Since a gold loan is a secured loan, the gold acts as collateral. Lenders or creditors keep this collateral until borrowers repay the entire loan amount. Considering an instance where a borrower defaults, lenders use this collateral for regaining a portion or the entire amount that a borrower owns.
While this is a security aspect for a lender, in a way, this makes it risky for a borrower if the former turns out to be a fraud. Therefore, the only way out for ensuring security for borrowers is to opt for reputed financial institutions offering the best gold loan.
2. Not comparing rates of interest
Based on a loan applicant’s risk assessment by a lender, rates of interest for a gold loan scheme vary. The interest rate also depends on the LTV ratio. Lenders charge higher rates on loans with a greater LTV ratio to make up for the high risk involved. Therefore, to avoid high rates, it would be ideal to opt for a lender extending a high LTV ratio at a low-interest rate.
Additionally, one must keep in mind that while some lenders impose fixed interest rates on these loans, some go for the floating rate.
3. Not comparing processing fees
While there are lenders who charge a processing fee that starts from a considerably low amount, there are also financiers who consider the loan amount as a determiner for this fee. In addition to this, there are some lenders who waive off this fee, mainly during the festive season.
Therefore, it will be ideal if borrowers compare processing fees charged by different lenders, especially in cases where the ticket size of a loan is large.
4. Not considering repayment structure
Gold loan schemes provide high flexibility when it comes to repaying the loan. Several lenders extend customized options for repayment besides the EMI repayment mode. Individuals can select the option to pay regular EMIs for clearing the dues. They can also alternatively choose to pay the principal at the end of the tenor and the interest periodically or consider paying the principal later and the interest upfront.
On the part of the borrowers, it would be ideal if they looked into this repayment structure while acquiring a gold loan.
5. Ignoring repayment capacity
As the tenor of a gold loan varies, borrowers should always choose one, considering their repayment capacity. Individuals must choose a shorter tenor if they are confident about repaying a high loan EMIs within the due date.
6. Being unaware of the quality of gold accepted
While pledging gold ornaments for the gold loan scheme, individuals must ensure that the gold qualifies the minimum criteria for purity. The lenders accept gold ornaments that exhibit a purity of 18 carats to 24 carats after weight measurement.
7. Being unaware of the form of gold accepted
Apart from the quality of gold accepted, potential borrowers must keep in mind that a gold loan is only available against gold jewellery. Gold coins or bars are not considered viable collaterals for the disbursal of a gold loan.
Lenders offering gold loan schemes often do not factor in the credit score of potential borrowers. This implies that individuals can qualify for these schemes irrespective of their professions, given they possess adequate gold assets. So if you are seeking funds for some vital purpose and looking forward to a gold loan, do keep in mind the above mistakes to be avoided while applying.