When someone needs some urgent cash, the first thing they think of is a gold loan. A gold loan has been reliable in emergencies, whether it is for medical reasons or someone wants to invest in a small business. The reasons for this are many: low rate of interest, quick disbursement, etc. However, it is still a loan and you need to be cautious to prevent a heavy debt on your shoulders. People often make mistakes when applying for a gold loan that can easily be avoided with a little deliberation. What are these mistakes and what can you do to avoid them? Let’s get to know them:
A loan, at the end of the day, is a business transaction. You are borrowing money from a bank or a non-banking financing company (NBFC) against your gold with a promise to return all of it with the interest. It is your responsibility to check out various options to know which institution offers the most value for your gold and has the lowest rate of interest. Your goal should be to find the cheapest gold loan. And you can only do that when you check out various options. Check out the interest rate of a gold loan in all banks before applying.
Unless you want to be trapped in debt by a loan shark, you should check the lender’s credibility. Gold loans were categorised under the unorganised sector for the longest time, which made people fall prey to loan sharks. The business has slowly moved to the organised sector with RBI-governed NBFCs and banks. Still, it is your duty to personally check the background of the lender before filling the form. This will ensure you that your gold is in safe hands and you won’t be defrauded by any chance. It is recommended to never apply for a gold loan with an institution that has an unreliable background.
LTV stands for loan-to-value ratio. Creditors calculate it to assess the risk they will be taking by lending you money. In the case of gold, you never get 100% value of the gold as the sum. It’s mostly around 75%. For instance, if the gold you have is worth Rs 2 lakhs, the loan sum will be Rs 1.5 lakhs. However, this value depends from institution to institution. Some institutions even offer more than 75% value for your gold but also increase the rate of interest. If you don’t calculate your LTV, you will not get a good value for your gold.
In India, gold is mostly bought as ornaments and jewellery. The purity in gold jewellery is less than 24 karat. Further, gold jewellery has an emotional value in the heart of the owner. However, financial institutions have strict policies for the form of gold they lend money against. It’s important for you to read the terms and conditions of a gold loan before applying for it.
Gold loans are easy to avail of, however, they are still a loan and there is a risk involved. It’s easy to make a mistake when you are applying for the first time or your need is urgent. Either, be deliberate and avoid the aforementioned mistakes when applying for a gold loan.