RBI Issues Circular On Levying Unfair Interest Charges On Customers

Gold loan is emerging as a popular way of accessing quick credit.

In any financial emergency, gold can help you overcome the situation by unlocking its value quickly. It is emerging as a popular way of accessing quick credit. Banks and NBFCs grant loans on gold with a purity of 22 karats or above. Now lenders are waiving processing fees and offering low rates of interest to attract customers. If you are looking for a gold loan then you should avoid these mistakes, no matter how urgent the requirement for cash is.

Check interest rates

Gold loan interest rates can range between 7% and 26% per annum depending on the risk assessment of loan applicants by the lender. So, you need to do your own research to calculate your total cost and EMI before taking any decision.

Check loan to value ratio

In the wake of the pandemic, the RBI has raised the loan-to-value (LTV) to 90% for banks on gold loans from the earlier 75%. It means if your gold is valued at Rs 100, you would get a maximum loan of Rs 90. To avoid the burden of higher interest rates, go for those lenders who are offering a higher LTV ratio at the lower interest rate.

Repayment mode

Gold loans offer greater flexibility in terms of loan repayment. Apart from the EMI repayment mode, borrowers can opt for customised payment options. You can repay only the interest component every month leaving the principal component to be repaid on the maturity date.

Some lenders also allow borrowers to repay the interest component upfront at the time of loan sanction while allowing principal repayment at the end of the tenure. So before taking a gold loan one should check all the repayment clauses of the bank of the NBFC.

Prepayment charges

While lenders usually do not charge any prepayment fee for a gold loan, some may charge up to 2.5% of the outstanding amount if closed before the completion of the tenure. So, opt for a lender that charges minimal or no prepayment/ foreclosure fee.

Hidden charges

Companies often hide a lot of charges in their terms and conditions. Common charges include processing fees, appraisal fees, penal charges on late payments, and auction-related charges. Always factor in additional charges in your calculation to know the true financial cost of your loan. These hidden charges might come as a surprise and can be an extra burden.

There are lenders who waive off processing fees, especially during the festive season. As the processing fee can be of a sizable amount, especially in the case of big-ticket loans, it is better to compare these fees charged by various lenders.

Tenure

The gold loan comes with a tenure between three months to three years. Choose a tenure that suits you the best. Longer tenure will help to reduce the EMI burden. But the overall cost is also high. On the other hand, a very short tenure such as three months can lead to an auction very soon. Thus choose your gold loan tenure wisely as per your cash flow and repayment capacity.