Six things to consider before applying for a gold loan

Gold isn't just about jewellery; it can also unlock financial possibilities through loan against gold. These loans let you leverage your gold assets for quick cash, and there are many benefits of gold loan, making them a popular choice for many in India, as collectively, Indian households have more gold than what some smaller countries have in their vaults. But before you click “Apply Gold Loan” button, there are crucial aspects to consider for a well-informed decision.

Gold Loans Repayment

With a gold loan, you have options for repayment that suit your financial situation:

Equated Monthly Instalments (EMI)

How It Works:

• Structure: Under EMI, you repay a fixed amount every month that encompasses both the interest and principal components of the loan.
• Calculation: The EMI amount is calculated based on the loan amount, interest rate, and tenure.
• Early Payments: Initially, a larger portion of your EMI goes towards interest, gradually shifting to principal repayment over the tenure.

Advantages:

• Budget Planning: Offers a predictable payment structure, aiding in effective budgeting.
• Reduced Default Risk: Helps in reducing the likelihood of default or payment delays.

Disadvantages:

Higher Interest Payment: May result in a higher overall interest payment compared to other repayment methods.

Bullet Payment

How It Works:

• Interest Upfront: In this method, you pay the interest component upfront at the beginning of the loan term.
• Principal Payment at End: The principal amount is settled at the conclusion of the loan tenure.
• Savings: By clearing the interest initially, you save on the interest cost over the loan tenure.

Advantages:

• Interest Savings: Allows for potential savings on interest costs over the loan term.
• Reduced Loan Burden: Offers the opportunity to lessen the overall loan burden.

Disadvantages:

• Lump Sum Requirement: Requires arranging a lump sum amount at the end of the tenure, which might pose difficulty.

Interest First, Principal Later

How It Works:

• Interest-Only EMIs: Throughout the loan tenure, you pay only the interest component as EMIs.
• Principal Repayment: The principal amount is deferred and paid at the end of the loan tenure.
• Monthly Outgo: Monthly payments consist solely of interest, reducing the immediate financial burden.

Advantages:

• Lower Monthly Outgo: Allows for lower monthly payments, managing cash flow effectively.

Disadvantages:

• Higher Interest Cost: Might result in a higher overall interest payment due to deferred principal repayment.
• Large Principal Amount at End: Faces the challenge of a substantial pending principal amount at the loan term's conclusion.

Each repayment method serves unique financial needs and considerations. Assessing your financial capacity and future prospects can guide you in selecting the most suitable repayment method that aligns with your needs and helps you manage the loan efficiently.

Where to Secure a Gold Loan

While jewellers and pawn shops offer gold loans, opting for a regulated bank or NBFC like IIFL ensures the safety and fair valuation. Research and compare lenders to make an informed choice that aligns with your needs. Don’t shy away from searching for things like “jewel loan interest rate”, “gold loan rate of interest”, “gold loan documents”, “gold loan at home” and wherever your curiosity takes you, before applying it is important to know if the provides all the services needed.

Good Customer Support

Even if you pledge gold loan from a good bank, a bad customer support can make your gold loan journey a nightmare, so here are a few things to look out for in customer support:

• Settling Dues Hassle-Free:

A reliable customer support system assists in resolving queries and addressing concerns promptly.

It streamlines the process of settling dues, ensuring a smoother experience for borrowers.

• Real-Time Assistance:

Access to real-time assistance helps in immediate resolution of issues or queries, preventing any delays in repayment or documentation.

Timely Communication for Repayment Reminders.

• Text Messages, WhatsApp, and Emails:

Timely reminders through various channels such as text messages, WhatsApp, and emails ensure borrowers stay updated on repayment schedules.

Helps in avoiding penalties by keeping borrowers informed about due dates for both principal and interest repayments.

• Enhanced Transparency:

Regular communication fosters transparency between the lender and borrower, reducing the chances of missed payments or misunderstandings.

By ensuring a lender has an effective customer support system and proactive communication on repayment schedules, borrowers can navigate their loan terms more smoothly and avoid any penalties or defaults.

Types of Gold Accepted as Collateral

You can pledge various forms of gold, but there are conditions to meet:

• Gold should be a minimum of 18 karats, with higher purity fetching higher value.
• Jewellery with stones or metals won't count for the loan value; only the gold matters.
• Gold coins must have purity exceeding 99.99% and weigh up to 50 grams for loan eligibility.

Understanding Loan-to-Value Ratio (LTV)

Understanding gold LTV ratio before taking a loans is really important. Your loan amount hinges on your gold's purity, weight, and the lender's LTV. LTV represents the percentage of the gold value you can borrow. For instance, with an LTV of 75%, if you're considering a gold loan for 1 lakh, you could secure Rs. 90,000, depending on the purity and weight of your gold. RBI guidelines cap LTV at 75%. You can even use a gold loan calculator to crunch these numbers.

Understanding the Importance of Gold Insurance

When you pledge your gold, it's crucial to safeguard it. Though lenders take precautions, unforeseen events like theft or fire pose risks. Getting your gold insured through the lender or a third-party insurer shields you against such potential losses.

Responsible Borrowing Practices

A gold loan offers convenience, but responsible borrowing is key:

• Borrow only what you need and can repay comfortably.
• Maintain a record of repayments to avoid defaults or delays, ensuring a beneficial gold loan experience.
• By understanding these nuances and approaching your gold loan prudently, you can utilise this financial tool effectively to fulfil your monetary requirements.

Conclusion

Gold loans are typically for a short term tenure , and it helps if during this period, there is clear and timely communication from the lender.

This is why it is important to stay away from local moneylenders and to choose a reputable lender and market leader like IIFL Finance. Doing so will ensure that the entire process from application to loan disbursal and then from repayment to the return of the gold to the borrower, is smooth, timely and hassle-free. To check Gold Loan amount eligibility, you use the gold loan calculator online at IIFL Finance.