Know The Critical Aftermaths Of Defaulting Gold Loan EMI And How To Avoid It
Table of Contents
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. Learn More about what happens if gold loan is not paid.
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.
Frequently Asked Questions
When you don't make your monthly principal or interest payments as agreed upon, you're in default on your gold loan. In such a situation, the lender could remind you and present alternatives like renegotiation. However, persistent nonpayment may have detrimental and long-lasting effects. It is crucial to make timely payments that gives you the easy release of gold following loan closure.
Defaulting on a gold loan often results in financial penalties rather than incarceration. Because gold loans are secured, lenders usually collect payments through the pledged gold. If repayments are not paid, the lender may sell the gold at an auction. Borrowers should repay promptly to safeguard their credit score from being reduced and prevent losing pledged valuables.
The lender may pursue legal action to recoup the remaining debt if a borrower fails and the gold auction does not completely collect the outstanding balance. Usually, lenders send out reminders and give choices for repayment before moving further. These methodical processes give appropriate debt recovery while providing you the security of the pledged gold.
Defaulting on a gold loan might damage your credit score, making it more difficult to get loans in the future. Lenders track repayment activity, and missing payments signal a higher credit risk. This can undermine financial credibility and restrict future borrowing possibilities. Maintaining regular payments helps to sustain creditworthiness and provides the easy release of gold.
Yes, if a borrower misses EMI payments on a gold loan, the lender may impose extra interest. Depending on lender policies, this extra may raise the current interest rate. Additionally, lenders could present opportunities for renegotiation with updated conditions of repayment. These methodical procedures assist lenders in controlling risk while providing the security of the pledged gold.
Yes, before auctioning pledged gold, lenders provide prior notice to borrowers. They are given a reasonable period, as per lender policies and regulatory guidelines, to repay dues or revise loan terms. Clear communication ensures borrowers understand outstanding amounts and auction details, giving them an opportunity to reclaim their jewellery.
Yes, a history of EMI defaults can harm your credit score and weaken future credit prospects. Defaults signal higher financial risk, and lenders review repayment history before approving new loans. Timely repayments help ensure smooth gold release at closure and maintain creditworthiness. Consistent repayment discipline may also help borrowers access attractive interest rates.
Disclaimer : The information in this blog is for general purposes only and may change without notice. It does not constitute legal, tax, or financial advice. Readers should seek professional guidance and make decisions at their own discretion. IIFL Finance is not liable for any reliance on this content. Read more
