Indians are known for holding gold as a savings instrument. Ornaments and jewellery made of gold can be found in almost all households across India. In the past few years, the gold loan has emerged as a popular mode of procuring easy capital. Hence, gold is now slowly transitioning from being a savings instrument to becoming a powerful credit instrument. However, not many people are fully aware of gold loans. In this article, we will discuss seven common mistakes to avoid when applying for gold finance.
7 Common Mistakes while applying for Gold Loan
Choosing High-Interest Rate Schemes
Loan to Value ratio or LTV is the amount of loan against the gold you can avail on the value of the gold you possess. The value of gold is determined based on the rate of gold in the market. The maximum LTV allowed by RBI is 75%. Gold finance companies often offer you a higher LTV for a higher rate of interest. Do not fall for this trap. Always prefer a lower rate of interest over a higher loan to value ratio. A higher rate of interest rate will make the repayment tough in the long-run. You can use a gold loan calculator online to know about the LTV offered on gold value.
Not Calculating Exact Rate of Interest
Do not take the interest rates being marketed by the gold finance companies on their face value. Sometimes, there are too many terms and conditions associated with the same that may inflate the final interest rate. There are even clauses in the agreement, which start increasing interest rates after a certain period during the tenure of a gold loan repayment. Read all the documents carefully and trust only the best gold finance providers in the market by comparing different lenders online.
Wrong Mode of Repayment
More often than not, customers choose the wrong repayment mode, which gives them trouble in stabilising their cash flow. You should only pick a repayment mode that gives you enough flexibility and will not penalise you a lot for missing the payments for a couple of cycles.
Ignoring Hidden Charges
Ignoring hidden charges associated with taking a loan against gold can prove to be costly in the long run. Common charges include processing fee, appraisal fee, foreclosure charges, penal charges on late payment, and auction-related charges. These hidden charges are often layered within the terms and conditions, and you should always factor in these charges before you settle down for the final agreement.
Wrong Tenure of Repayment
Choosing a longer tenure for a higher interest is one of the worst mistakes you can make while taking a gold loan. The absolute value of the monthly EMIs might look smaller when you increase the tenure, but the eventual interest you end up paying is much higher than what you had planned initially. You can calculate the right amount of EMI for the right tenure of repayment using a gold loan calculator online.
Terms for Auction
In case you default on loan repayment, the gold finance company is entitled to auction or sell your gold in the market and recover their principal amount. You should make sure, right at the beginning of the agreement, about the terms and conditions for the auction. You should be properly intimated in advance in case an auction is going to take place. The gold finance company should give you ample time to recover your asset before it goes for an auction.
Neglecting after Sales Service
It might seem unnecessary at the start, but during the tenure of repayment, you will face certain challenges for which you need to have good support from your gold finance company. Big gold finance companies like Muthoot FinCorp Ltd. provide brilliant after-sales services to their clients.
Whenever you plan to take a loan against gold, try not to make any of the common mistakes listed above. Avoiding these mistakes will help you make an informed decision. Gold loan as a credit instrument is a brilliant option to finance your short-term needs. Just make sure you choose a reliable lender in the market after thorough research.
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