Gold loans are extremely popular in India mainly because of the popularity of gold jewelry in Indian culture. Most households have a decent amount of jewelry at home which they can use to get short-term gold loans. Some people also invest in gold and resell it when the prices are high in the market.
If you are planning to get a gold loan yourself, then be sure to keep the following things in mind:
1. LTV Ratio
If you are expecting that you can get a loan equal to the value of the gold you are offering, then you will be disappointed. This is because no lender offers an amount equal to the full value of the gold. Instead, they follow an LTV ratio aka “Loan to Value” ratio. So, if the LTV ratio for a loan is 70% and your gold is valued at Rs. 1 lakh, then you can get a loan up to Rs. 70,000 only. Another thing to note here is that as per RBI’s norms, the LTV ratio can’t be above 75%. So, in the best-case scenario, you can get only 75% of your gold’s value as a loan.
2. Short-Term Constraints
Gold loans are short-term loans with tenures ranging from a few months to up to 1 year. So, make sure that you are able to repay the loan within a short period. If you require a large amount and need several years to repay it successfully, then you should look for other options like personal loans, mortgage loans, etc. You can also check out NFBC platforms that offer online loans at competitive interest rates.
Failing to repay a gold loan within the agreed-upon term can have a negative impact on your financial credibility. You may have to pay a huge fine, and your credit score can be hurt too.
3. Loan for Low CIBIL Score
Although gold loans are easy to get compared to unsecured loans like personal loans, you still need to have good credit to qualify. So, if you are looking for a loan for low CIBIL score, they may have a hard time getting one. This is because even though you are offering collateral as gold, you still need to prove that you are a responsible individual who is capable of repaying the debt. If your credit score is low, or if you have a history of frequent late payments, then the lenders can reject your loan application easily.
The reason why a gold loan is easy to get is because you have to hand over your gold to the lender which serves as security. However, you should be careful who you choose to get the loan from. This is because there isn’t always a guarantee that a lender gives your gold back even after you have repaid the loan. If they decline your request, then it can create a whole new legal problem for you. If they misguide you and trick you into signing an agreement which works against your interest, then there is little that you can do. Thus, it’s really important that you conduct a background check on the lender you have decided to get the loan from. You can read the reviews of various lenders online to see which ones have a good track record.
5. Knowing Your Gold
Most lenders accept gold only if it has a purity of 22 karats or above. You also cannot offer gold bars or bullion for the loan. Another thing that you should know about gold loans is that if you are offering jewelry that’s studded with gems and diamonds, then only the gold’s value will be considered for the loan amount. In other words, the overall value of your jewelry might be high because of the gems, but the loan’s amount will always be based on the amount of gold it has as well as the gold’s purity.
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