What is a gold loan?
Gold loan is a loan that you can receive from a bank or a financial institution against your gold jewellery, gold bars, or gold coins. It is usually a short-term loan in which gold is pledged against the money borrowed and this makes the interest rates lower than those charged on personal loans.
Gold loans are easy to secure and are convenient in the sense that banks and financial institutions provide a number of repayment methods. When you secure a loan against gold in India, your gold jewellery will be evaluated for purity and your loan processed for a fee. You are expected to make monthly repayments of the loan amount and the interest installments as well.
What happens if you can’t repay a gold loan?
You Receive Repeated Reminders
With every loan comes reminders – calls, e-mails, letters, and text messages reminding you of the payment amount, due date etc. A failure to repay even a single installment will prompt the lender to send repeated reminders. Much of this done in an effort to keep the borrower apprised of the default and its consequences.
Penal Interest is Imposed
A gold loan lender may impose a penal interest which is an additional interest over and above the regular monthly interest for the missed months. This could range from 1% to 7% per annum.
Gold is Auctioned
Since the gold has been pledged as collateral against the loan, failure to repay (three consecutive payments or more) will ultimately lead to the gold being auctioned off by the bank or the financial institution. This is now a non-performing asset and will be sold off for recovery. Now the auction is a fair price sale but the jewellery is sold only for the value of the gold. This means that you will lose any making charge that you may have paid. Any gemstone fitted in the gold will be returned to you and any recovery made in excess of the gold amount will be returned to you. This is still a considerable loss to the borrower since any due interest is also recovered from the auction proceeds.
Affects Credit Score
One thing of note that all gold loan borrowers must take note of is that defaulting on any loan, including a gold loan, will adversely affect your credit score. A credit score is a three-digit number that denotes the creditworthiness of an individual based on his or her income and past credit history. It is provided by organizations such as CIBIL, Experian, Equifax, and Highmark. A lower credit score will make it difficult to obtain any loan or even a credit card in the future. Failure to repay a gold loan may bar you from being eligible for receiving any more loans in the future.