When you are in a difficult financial situation, it can be tempting to take a gold loan. You may be wondering if it is the right choice for you. In this blog post, we will discuss the pros and cons of taking a gold loan.
There are a few things to consider before taking a gold loan.
First, you should think about whether or not you will be able to repay the loan. If you cannot repay the loan, you may end up losing your gold.
Secondly, you should consider whether there are any other options. You may be able to get a loan from a friend or family member. Or you may be better off resolving your existing debts instead of taking another one.
Finally, if you do decide to take a gold loan, you should only borrow as much money as you need and you should make sure that you have a plan for how you will repay the loan. Remember that your gold is at risk if you cannot repay the loan.
Gold loan is the last resort in India
Taking a gold loan is seen as a social stigma in India since it indicates severe financial hardship and is considered one of the last alternatives for borrowers to seek funding.
In India, gold is not only seen as a valuable commodity but also a symbol of social status. Consequently, when an individual is unable to repay a gold loan, they face the social consequences of being labelled as “financially irresponsible.”
Indian women in general are very reluctant to mortgage their jewellery to get a loan. The reason being, they fear that they may not be able to repay the loan and would consequently have to give up their jewellery.
Loan settlement could be a better alternative
If you are unable to repay your existing loans and are considering a gold loan to repay existing debt, one option is to try and settle the old debt with the lender.
The process of loan settlement involves negotiating with your lender to agree on a new repayment plan or lump sum amount that is less than what you originally borrowed.
Loan settlement can be a challenging and time-consuming process, but it may be worth it if you are able to negotiate a lower repayment amount.
Benefits of loan settlement:
-You may be able to reduce your overall debt burden
-You can avoid the social stigma associated with defaulting on a loan
-You can avoid mortgaging your gold jewellery
-You may be able to improve your credit score in the long run by successfully negotiating a loan settlement
Things to consider if you do take a gold loan
Taking a gold loan can be a risky proposition. You should carefully consider all of your options before making a decision. If you do decide to take a gold loan, make sure that you understand the terms and conditions. Here are some things to consider:
Banks versus NBFCs
Should you take a gold loan from a bank or NBFC?. Banks usually offer better interest rates, however NBFCs can lend higher amounts as they value your gold at a higher price than banks.
Banks usually charge an appraisal and processing fee of 1-2 percent of the loan amount, but NBFCs do not.
Finally, NBFCs tend to have a more flexible approach when it comes to repayment terms, so you may be able to negotiate a better deal.
When taking a gold loan, the purity of your gold is important as this will determine the value of your collateral.
24 karat gold is pure gold and therefore has the highest value. 18 karat gold is 75% pure and 14 karat gold is 58.33% pure.
The lower the purity of your gold, the lower the value and the less money you will be able to borrow against it.
Valuation Of Gold
The amount of the loan you can get will be determined by the value of the gold. As a result, the purer the gold, the greater the loan amount. The gold must generally be of 18 to 24 carats in order to qualify for a loan.
Aside from that, if you want to borrow money against jewelry with stones set in them, the value of the stones will be subtracted. For the purpose of obtaining a loan, only the actual gold value will be considered.
Loan to value ratio
The loan to value (LTV) ratio is the amount of money you can borrow against your gold. For example, if the LTV ratio is 75%, that means you can borrow up to 75% of the value of your gold.
The LTV ratio will vary depending on the lender, but typically ranges from 50% to 80%.
Repayment terms and conditions
When taking a gold loan, you should always understand the repayment terms and conditions. Make sure that you know when the loan is due and what the penalties are for late payments.
You should also be aware of any prepayment penalties that may apply. Prepayment penalties are fees charged if you repay your loan early.
The Bottom Line
Taking a gold loan can be a good way to get quick access to cash. However, it is important to understand the risks before making a decision. Be sure to shop around for the best interest rates and terms before signing on the dotted line.
If you are unsure, you may want to speak to a financial advisor. They will be able to help you decide if taking a gold loan is the right choice for your situation.
If you want to consider loan settlement as an alternative, we can help you to negotiate a lower repayment amount with your lender. Contact us today and start the journey towards a debt free life!
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