When you opt for a loan against gold, you can borrow funds by pledging your gold jewellery as collateral. This type of borrowing is popular due to its accessibility, quick processing, and relatively lower interest rates compared to unsecured loans. Gold loans are offered by various financial institutions, including banks, Non-Banking Financial Companies (NBFCs).
Lenders evaluate the value of your gold items based on their weight and purity, offering a loan amount that can go up to 75% of the gold's value, known as the gold loan per gram rate The loan tenure can vary, and it is also important to consider the gold loan interest rate when determining the affordability of the loan.
Repaying a gold loan is a crucial aspect of the borrowing process. Failure to repay the loan can have certain consequences. Read to know what happens when you do not repay your gold loan.
Risks of not repaying a gold loan on time
Missing gold loan instalments can lead to serious consequences. It is important to be aware of what can happen if the loan is not repaid on time. Here is a list of things to be prepared for in such a situation:
Penalty charges: Lenders usually charge a penalty for late payments. This penalty adds to the interest you already owe, making your loan more expensive over time.
Drop in credit score: Failure to repay a gold loan on time can hurt your credit score. A low credit score can make it difficult to get other loans or credit cards in the future.
Repeated reminder calls and notices: You may receive regular follow-up calls or legal notices from the lender if payments are missed. These reminders can become stressful over time.
Auction of pledged gold: If you fail to repay the loan after several reminders, the lender may auction your gold to recover the loan amount. Once the gold is sold, it cannot be recovered.
No refund if gold is auctioned: If your gold is auctioned and the selling price is more than what you owe, the excess amount might not be returned in some cases, especially if there are legal or processing charges.
Loss of valuable asset: Gold often holds emotional and financial value. Losing it due to non-payment can be distressing for many families.
To avoid these issues, it is advisable to pay on time or speak to your lender about restructuring the loan.
How to prevent loan repayment default?
Avoiding a loan repayment default is very important to keep your credit score healthy and avoid penalties. If you are taking a gold loan or any other type of loan, being careful with your repayments can save you from stress and financial trouble. Here are a few simple ways to prevent loan repayment default:
Plan your budget properly: Before taking a gold loan, check the repayment frequency you can afford. Include all your expenses and income to make sure you can repay the loan without delays.
Choose the right loan tenure: Select a repayment period that suits your financial situation. A longer tenure may reduce repayment instalment but increase interest. Pick a plan that is affordable and manageable.
Set reminders for due dates: Mark your loan instalment dates on your phone or calendar. Timely reminders will help you avoid missing payments.
Keep a separate fund: Maintain a small savings fund to cover at least 2–3 repayment instalments. This emergency amount can help in case of temporary money issues.
Use auto-debit facility: Opt for an auto-debit option with your bank. This ensures your instalment is paid automatically every month on time.
Speak to the lender if you face problems: If you cannot repay your gold loan on time, contact your lender.
By following these tips, you can easily prevent a loan repayment default.
Impact on credit score
Defaulting on a loan against gold, can negatively affect your credit score. Non-payment or delayed payments are reported to credit bureaus, which can lower your creditworthiness and make it challenging to access loans in the future.
To ensure responsible borrowing, evaluate your financial capability to repay the gold loan within the specified period. If you face difficulties in repayment, discuss the situation with the lender, and explore alternative repayment options.
If you are considering renewing your gold loan, it is important to review the terms and conditions. Some lenders offer the option to renew or extend the loan tenure, but it is crucial to understand any associated costs, such as renewal fees or changes in the gold loan interest rate.
A gold loan provides immediate access to funds by pledging gold as collateral. However, non-repayment can lead to penalties, auctioning of the gold, damage to your credit score, and potential legal consequences. It is crucial to fulfil the repayment obligations to maintain a healthy financial standing and preserve your valuable assets.
