Let’s have a look at some basics of gold loan:
Borrowing gold is attractive because it raises several questions. The lender does not ask you to disclose your income, issue a salary slip or worry about your credit score or credit report. But think of it; why should a lender worry? It has your precious gold and the actual loan issued at 75% or less than the market value of gold. The lender is only in trouble if the price of gold hits 30% +. But past data shows that a sudden gold rush is a possibility, if not, and when prices fall, lenders immediately begin to pressure the borrower to repay part of the loan or bring more gold/jewelry as collateral.
In most cases, interest is only charged every month, and the principal may be paid at the end of the gold rush period. The borrower may choose to repay interest and principal at the end of the term. However, the latter will seem more expensive as the gold loan interest rate increases. If a person makes a mistake in paying interest, the fine can be huge. As with all other loans, lenders may charge processing fees, estimates, late payments, and prepaid fees, all of which add to the costs. Each lender has a different set of cases. Unlike the equitable monthly installment (EMI), both payment options involve pressure on the borrower to bring a large amount of money to pay, to extract gold. This loan gives you the best benefits always.
The process is quick but not transparent:
Many non-bank financial institutions (NBFCs) claim to offer loans of 70% -75% of the market value of the gold item. However, when we asked for the right amount, we were told that once they had seen the jewelry, they would be able to provide a direct loan for the value that could be used. Even the RBI team has found that the borrower is often unsure about the amount of gold used to measure ornaments.
The RBI team found that the format and content of the documents followed by each NBFC appeared to be different, although each of them claimed to provide a wallet ticket and a copy of the loan agreement to the borrower. However, while talking to the complaining borrowers, they found that the paid tickets did not have the specific details of the gem issued, their weight in grams, and the value of the valuation. It does not have complete details of the annual interest rate, the maturity of the loan, details of the auction process in the event of non-payment, any other charges.
The actual cost of a gold loan:
When you borrow gold jewelry, you pay the highest interest rate and documentation, processing, and valuation values on the property you own. Also, since people only borrow gold in the worst-case scenario, the chances of repaying within a year are lower, which means that interest rates increase and the risk of default is also higher.
We have supported our study on the cost of the ICICI Gold loan. We were told that the interest rate would be 2% per month (afternoon) and the loan (VTV) would be about 70%. There is a stay of about three months; hence, at the end of each quarter, once interest has been paid, the loan can be extended for another three months. This can continue until all the principal is paid. However, as the contract is renewed every three months, the borrower may need to promise more gold, if the price of gold drops and does not meet the LTV standard.
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