By Gaurav Aggarwal

With quick disbursal and flexible repayment options, many Indians are turning to gold loan to meet their financial requirements. Let us discuss some of the mistakes that gold loan applicants make while applying for gold loans.

Not comparing interest rates

Gold loan interest rate can range between 8.85% to 29% per annum depending on the risk assessment of loan applicant by the lender. As RBI allows LTV ratio of up to 75% of the gold’s value, interest rate may also depend on the LTV ratio allowed. Lenders charge higher interest rates on gold loans with higher LTV ratio to make up for the higher risk involved. Hence, to avoid the burden of higher interest rate, go for lenders that offer higher LTV ratio at lower interest rate. Remember, a sizeable number of lenders charge fixed rates on gold loans whereas the rest charge floating rates.

Not factoring in processing fees

While some lenders charge a flat processing fee starting from as low as Rs. 10, processing fee levied by others depend on the loan amount, usually 0.10%-2% of the loan amount. There are lenders who waive off processing fees, especially during the festive season. As the processing fee can be of a sizeable amount, especially in case of big ticket loans, compare processing fee charged by various lenders.

Not checking prepayment charges

While lenders usually do not charge any prepayment fee for gold loan, some may charge up to 2.25% of the outstanding amount if closed before the completion of the tenure. Given that the prime objective of making prepayments is to save on the interest cost, incurring prepayment penalties would reduce the benefit from making prepayments. Hence, opt for a lender that charges minimal or no prepayment/ foreclosure fee.

Not comparing repayment structure

Gold loan offers greater flexibility in terms of loan repayment. Apart from EMI repayment mode, borrowers can opt for customised payment option. 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 interest component upfront at the time of loan sanction while allowing principal repayment at the end of the tenure. Bullet repayment option allows borrowers to repay both interest and principal components at the end of the tenure. Opt for the repayment that suits your cash flow the best.

Ignoring repayment capacity

As the gold loan tenure can range anywhere between seven days to four years, opt for a tenure on the basis of your repayment capacity. If you are opting for the EMI option, factor in monthly contribution required for other financial goals. Opt for shorter tenure if you can comfortably repay your gold loan EMI by the due date.

Bottom line

Gold loans score over most alternative loan options owing to advantages like quick disbursal and flexible repayment options. Being an asset-backed loan option, lenders do not factor in credit score while approving your application. This makes it a prudent choice for those with no or low credit score. However, salaried applicants employed in a reputed organisation with a good credit profile may find personal loan or other at cheaper rates and for longer tenure.

(The writer is director & head of unsecured loans, Paisabazaar.com)