In India, gold is considered not only beautiful, but also a place to keep rainy days. As Indians continue to use gold loans in times of financial crisis, the indebted market for gold loans in India is projected to grow to Rs. 3,101 billion by 2020 in the CAGR of 13.7 percent. Although gold loans are readily available and widely advertised today, it is easy to become overwhelmed when you apply for them. Here are five key pointers to avoid when applying for a gold loan.
- Not to test the credibility of the lender:
When you take out a gold loan, you prove your gold to the lender at a rate based on its value. As an asset-backed loan, your gold remains with the lender until it is paid off in full. Check the credibility of the lender and compare the lender online. You can use the services of web aggregators to compare lenders on things like annual interest rate and processing costs.
- Not checking enough options:
There are various lenders like Jana Small Financial Bank who are willing to give you a gold loan today and each bank has a different offer. When looking for gold loan options, it is wise to look at all the options before making a final decision. Almost all lenders have a competitive and attractive gold loan proposal; make sure you read good printing before choosing your preferred lender. As a borrower, you may want to research your primary selection tool. Talk to as many lenders as possible and compare their contributions according to the interest rate and Loan to Value ratio (LTV), and come to a short list. After that you can make the final choice based on the best offer according to your requirement.
- Not knowing your gold:
Gold lenders borrowed money from gold jewelry for a purity of 22 karats or more. In addition, bars of gold, bullion or gold in excess of 50 gms were accepted as collateral by banks and financial institutions. Also, if promising jewelry is full of gems, the value of the gemstone is not considered. Therefore, it is important to know your gold, its purity and its value before applying for a loan.
- Not knowing all the details of LTV on your gold loan:
If you apply for a gold loan, you may not get the full amount of gold as the loan amount. As per the rules by Reserve Bank of India, the credit-to-value (LTV) rate for gold loans cannot exceed 75%. For example, if your gold price is Rs. 1 lakh you can get a loan of up to a maximum of Rs. 75,000. This rate determines the amount of credit you can get compared to your gold. Different lending institutions use different limits to reach this level. As a borrower, you should know what goes into the LTV’s credit rating.
- They do not understand EMI options:
Gold loans are not only readily available, as they are a safe way to lend, lenders often offer the benefits of various payment structures to their lenders. Here are four payment methods you should consider.
- Standard EMI – The basic monthly payment structure. This is the option which is best suited for you if you are a paid employee with an income.
- Low Payment- Customized EMI structure; where you pay the principal amount initially to reduce the interest rate. This option of EMI is ideal for many business owners. Owners of a business may find it easier to repay the loan at the beginning of the loan period to reduce the interest rate over time.
- EMI interest only – a custom payment option, where you can only pay interest as EMI to pay the principal amount in full (depending on the maturity of other investment options). You can also consider this option if you are sure that you will get the maximum amount (from the maturity of your previous investment) that accompanies the end of your loan term.
- Amendment payments – Here, interest is calculated on the loan amount on a monthly basis, but you can choose not to pay EMI during the loan period. Instead, it returns the full amount and interest at maturity. You can consider this option if the cash flow is uncertain for a while but you are sure that it will be renewed at the end of your loan term.
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