What Are Gold Loan Risks?

Risk arises for the lender when gold prices fall sharply, and the borrower defaults on payment. Read to know the gold loan risks here!

2 Jan,2023 10:53 IST 1949 Views
What Are Gold Loan Risks?

Financial exigencies come undeclared and need fast thinking and quick action. Loans are easy bailout packages, but with multiple loan options available these days, one needs to be careful about what they choose. Personal loans provide help in immediate cash crunch but they may have higher rates of interest. Mortgaging idle gold assets can be a good alternative to a personal loan, but it too has its advantages and disadvantages.

A gold loan is an easy and straightforward method of raising quick money. In fact, gold loans are emerging as a popular financing option as compared to personal loans because of lower interest rates charged by financial institutions. The flexible repayment options also make it one of the popular loan products. Borrowers can pay in the form of regular EMIs, interest-only repayment or as bullet payments. For lenders, this form of loan means lesser risk as the pledged gold assets can be used to make up for the default payment, if any.

Before finalising the loan deal, borrowers must thoroughly understand how the bank of the non-banking finance company calculates the value of the total loan for lending purposes. It is important to be aware of the benchmark price that the lenders are using and how they are arriving at the current value.

Risks involved

Gold loans are good in a rising market. Gold prices in India have soared multiple times in the last few decades. However, markets have also seen gold prices touch a bearish phase often. So, if gold prices fall drastically during the loan tenure, banks may ask for the payment of the difference. In these situations, borrowers may have to pledge extra gold to make up for the loss of value of the pledged gold.

The value of the gold is determined as per the current market rate of gold. A certain percentage of the value of the pledged gold, after appraisal, is offered as loan. This percentage is known as loan-to-value ratio. This ratio is evaluated at the time of processing the loan.

When the price of gold plunges, the ability to borrow decreases. Contrarily, when the price of gold appreciates, the ability to borrow increases. Borrowers can get a higher loan amount for the same quantity of gold. But for a gold loan taken at a higher loan-to-value ratio, a fall in the price of the gold means the borrower needs to pledge more collateral. Alternatively, he can make up for the margin in cash.

Lenders evaluate the quantum of the outstanding gold loan considering the loan-to-value and the pending loan tenor before raising the further pledge request. If the borrower fails to pay the extra, it means defaulting on loans. The lender may charge a penal interest rate on the outstanding loan amount in case of non-payment. It may send repeated notices and in extreme cases, may even auction the pledged gold.

Conclusion

The convenience of securing funds against a liquid asset, which otherwise would have been lying unutilized at home, is substantial for borrowers who are in dire need of money. Being secured, this loan comes at a lower interest rate. Moreover, the loans may be provided for 70-85% of the value of gold. But one should be careful about when to avoid it.

Under normal circumstances when the gold rates are fairly good, opting for a gold loan, especially with a poor CIBIL score or a low-income range, may be wise. But in a sinking market, gold may not fetch the expected amount of funds, as required.

Another major mistake which people commit is not checking the lender’s credibility. Gold loans are riskier for the borrower as the pledged gold is with the lender till the time the loan is returned completely. Hence, it is important to avail a gold loan from reliable lending institutions like IIFL Finance.

IIFL Finance gold loans can be taken by individuals who are in urgent need of money and have idle gold jewellery in their lockers at home or in a bank. IIFL Finance, one of India’s biggest NBFCs, offers these short-term loans at attractive interest rates. The loan process is fully online and customer oriented, involving simple steps tailored to offer a unique experience. Most importantly, the pledged gold ornaments are kept in secure lockers so that borrowers don’t have to worry about losing their precious jewellery.

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