Know The Critical Aftermaths Of Defaulting Gold Loan EMI And How To Avoid It

Gold loans have become one of the preferred ways for individuals to raise money to fund an unplanned or emergent expenditure. These loans given by banks and NBFCs against gold deposited as a collateral have become a convenient way to raise finance due to the quick processing time. More so as many lenders make it possible to apply for the loan online and complete the processing of the loan without stepping out from the comfort of your home. Many lenders now send their representatives to the prospective borrower’s home for the valuation of the gold to be deposited as security against the loan. In addition, the gold loan interest rate is usually lower than the interest rate on personal loans. The gold loan minimum interest rate offered by lenders is sometimes almost 3% lower than the personal loan interest rate offered by them. In addition, while personal loans are usually offered to borrowers with a credit score of 700 and above, one can get a gold loan with a low credit score as well. This makes gold loans far more appealing during times of emergency.

Suggested Reading: Why gold loans are a dependable option in uncertain times?

However, while these factors make gold loans rather appealing, gold loans have a major drawback. This drawback is the repayment mode and tenure. Most gold loans come with a repayment tenure of 6 months, while the maximum tenure offered by some lenders is 24 months. In the case of loans, where the repayment is by Equated Monthly Installments (EMI), consisting of principal and interest, the Gold Loan EMI can be rather high, especially if the loan amount is high. For e.g. suppose you take a gold loan of INR 10 Lakhs with a repayment tenure of 2 years and an interest rate of 12%. You would have to pay an EMI of INR 47,073/- every month.

Some gold loans repayment terms and conditions require you to pay the interest component every month and the entire principal at the end of the loan period. Let us keep the loan amount, repayment tenure and interest rate per annum the same as in the above example, i.e. a gold loan of INR 10 Lakhs, a gold loan interest rate of 12%, and a tenure of 2 years or 24 months. In this case, you would have to pay an interest of INR 10,000/- every month and repay the entire loan amount of INR 10 Lakhs at the end of the tenure. There are several gold loan EMI calculators available online which will help you calculate the EMI payable on a gold loan.

While a borrower may rush to take a gold loan because of the ease of processing, the repayment terms may put him or her in a bind. The high EMI as a result of the short repayment tenure, or the need to pay the principal in one go at the end of the loan term may result in the borrower defaulting on EMIs or the final repayment. When this happens, lenders usually have the right to sell or publicly auction the gold in order to recover the loan amount. Some lenders may however not do this immediately on default, leaving auctioning as a last resort.

One of the first things a lender may do when you default on a gold loan is to send you a reminder regarding the due payment. Some lenders may give you the option to renegotiate the loan terms and conditions. Very often this option comes with a surcharge to the existing interest rate. This additional interest may vary from three per cent to twelve per cent per annum. In some cases, the lender may offer you a partial payment option as well.

If a decision is taken by the bank or the NBFC to auction the gold to recover the outstanding dues, the lender will give you a two-week notice period before auctioning. This will give you a chance to find a way to repay the loan and recover the deposited gold or renegotiate the terms of your loan. However, if you are unable to do so, the gold will be auctioned. If the proceeds from the auction are insufficient to repay your dues of principal and interest, the lender may take legal action to recover the shortfall amount from you.

Thus, while gold loans are relatively easy to get, you may lose your gold in case of default. In addition, defaulting also negatively impacts your credit score and the ability to get loans in future. It is therefore best to think carefully before applying for a gold loan and to do the maths in order to ensure that you have sufficient funds to cover the repayments in a timely fashion.