When dealing with financial turmoil, people might seek additional sources of funds, like secure or unsecured loans. Since unsecured loans have pre-requisites like high credit scores and multi-step processes, borrowers may avail secured loans instead. They can opt for gold loans if they have a sizeable portion of gold investments.
Borrowers must pledge a fair portion of their investments to avail these loans. Based on the loan-to-value (LTV) ratio, they may receive up to 75% or more as a loan amount against the gold collateral. And, unlike unsecured loans, fewer documents are requested with quicker loan disbursals.
Consequences of Gold Loan Defaults
While these loans are ideal for dealing with temporary or short-term financial constraints, they may affect borrowers in the long run. A continued deficit in income or another similar source could affect their ability to repay the loan. It may eventually lead to a loan payment default, i.e., a missed or delayed repayment.
Like any other loan repayment, failure to successfully pay the outstanding dues will land the borrower on the defaulters’ list. And it negatively affects their financial health like credit history and CIBIL score. To understand this better, check out some potential consequences borrowers may suffer by defaulting on gold loan payments.
● Lowered Credit Scores
Continued delayed or failed repayments will heavily affect your credit score. The credit history statement will reflect the record of defaulted payments and hinder your ability to avail credit in the future. Moreover, a lowered credit score will prevent other lenders from trusting you with unsecured payments.
● Repeated Reminders
After the first few failed payments, the bank or lender will begin sending you reminders about the missed payment. Or, they may send these reminders as the due date for the payment approaches. As the duration between non-repayment increases, they will use other means to reach out to you, like SMS, emails, and letters.
● Late-Payment Penalties
With every passing day since the missed payment, the lender will levy additional interest over the pre-existing interest rate of the loan. This extra fee will be applicable on all the months where the borrower failed to repay the loan instalment amount. The penalty fee can range between 1% to 7% p.a., but this percentage differs among lenders.
And lastly, after the lender has extinguished every effort to recover the loan amount, they will turn toward the gold collateral. After classifying your loan as a non-performing asset (NPA), the lender will auction the pledged gold to compensate for their losses. However, before finally selling the gold, the lender will approach the borrower to inform them of this decision.
5 Ways to Repay Gold Loans
While nobody anticipates financial impediments, there are still ways to recover from them. Especially if it means saving your pledged gold from being auctioned. Use the following tips to recover from gold loan defaults and promptly repay the amount owed.
1. Deferred Principal Payment
This option allows borrowers to continue paying the EMI as scheduled, but the borrowed principal amount can be paid later. Instead of paying the principal in instalments, the borrower can choose to pay it at the end of the tenor.
2. Part Payments
Gold loans have specific customer-centric approaches that allow borrowers to repay the interest and principal amounts at their convenience. It means they don’t need to conform to the pre-set EMI schedule. They can make partial or complete payments of both amounts.
So, if they repay the principal, followed by the total interest, it will considerably reduce the total serviceable interest.
3. Bullet Payment
Borrowers can approach the bank or lender for this option to hold out the repayment until the end of the tenor. It’s applicable for both the interest and principal amount. Simply put, borrowers are not required to make timely EMI payments. Instead, they can repay the entire amount owed with interest at maturity.
4. EMI Payment
Preferred by those with a regular income, EMI payments calculate the interest and principal amount together. These instalments can be paid in intervals of the borrower’s choice. Moreover, salaried individuals get an additional preference for gold loans owing to their repayment capabilities.
Use the amount to pre-pay your outstanding gold loan when a sudden windfall appears. It’s a viable way to foreclose the loan since most banks don’t levy penalties for loans sanctioned over three months ago. However, certain banks may charge between 0.5% to 2% of foreclosure fees.
If you wisely plan out gold loan repayments, it could come in handy to increase your credit score. These secured loans come with numerous benefits aside from paying financial obligations. Don’t let financial constraints jeopardise your credit history!
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