Know the critical aftermaths of defaulting gold loan EMI and how to avoid it

 by Priya Jadhav

Attributed to Ravish Gupta, Business Head – Gold Loan, Capri Global Capital Ltd

Gold loan is one of the most popular ways to borrow funds among Indian borrowers and has been part of society for centuries. It lets the borrowers meet any necessary financial obligations without many difficulties. Lower interest rates, ease in the process, less documentation, rapid availability of funding, and multiple repayment options offered by formal financial institutions have made gold loans a lucrative credit product. Gold loans come with relatively shorter repayment tenures as compared to other loans. Typically, a gold loan's maximum tenure for repayment is 24 months in the case of long-term loans repaid in EMIs / interest payments at a fixed frequency while paying principal at the end of tenure; and six months in case of short-term loans repaid in a lump sum.

A gold loan is a secured loan with moderate criteria and conditions that allows even borrowers with low credit score and history to apply. However, there are situations when the repayment of a gold loan gets missed. It is important to note that defaulting on repayment can have multiple consequences that varies from case to case. Even the action taken on the defaulted borrowers vary from one lender to another. That said, there are several actions a borrower can take to avoid default and even get out of it if they are already down that path.

Safeguard the pledged gold articles from the auction : In case the borrower does not repay the gold loan amount in full within the stipulated timeframe and repeated reminders, the lender has a right to publicly auction the gold articles and recover the losses. The lending institution intimates the borrower two weeks before auctioning the pledged gold. To avoid gold auction, borrowers must honor the notice with a timely response. In exceptional cases, partial payment mentioned in the notice can be paid at the discretion of the lender. The borrowers can also discuss extended timelines for repayment and the option to part pay as a solution to manage their repayment obligations.

Know and assess the payment options to avoid penalties for non-payment : Lenders may charge penal rate of interest to the borrowers who fails to make timely payments. It is subjected to the amount that is due starting from the day of the repayment due date. The penal interest is usually charged at the rate of 3% p.a. to 12% p.a. and differs from lender to lender. Gold loan lenders offers the freedom to choose the repayment method according to borrowers’ convenience. Weighing the pros and cons and determining the future possibilities of funds, can help borrowers choose the appropriate gold loan repayment option that best fits their needs.

There are multiple convenient options to pay back the principal and interest amount. The borrower can pay both principal and interest in monthly frequency. It works best for people with fixed monthly incomes. Secondly, the borrower can pay the interest at regular intervals and settle the principal amount at the end of tenure. In this option, the borrower does not need to worry about paying the principal amount throughout the loan tenure. Additionally, lenders also offer an option of partial repayment in which the borrower can make partial payments of the interest and the principal amount as and when they desire during the loan tenure. Under the bullet repayment option, a borrower can repay both the interest and the principal amount right at the end of the loan’s tenure. The interest on the loan is calculated each month but becomes payable only at the end of the gold loan tenure. In this arrangement, the borrower do not need to worry about following an EMI schedule or making partial payments throughout the tenure.

Avoid periodic and repeated reminders : Remember, lenders are regulated entities and provide written notice of default before initiating legal action against a defaulter. They do not intend to convict borrowers or strip their rights, instead offer a specified notice period to repay the outstanding dues. They are expected to make recurrent communication through emails, text messages, calls, and even letters at a later stage in case borrowers miss the repayment timelines or default on gold loans. The reminders are sent to keep the borrowers in the loop about the possible contingencies. A borrower must assess the repayment ability and discuss the repayment schedule with the lender to either reset or adjust.

Impact on credit score : Although there is no relation between credit score and the sanction of the gold loan, failure in repayment can have a bearing on the same. Gold loan companies in India usually send a notice to the credit bureau regarding the failure of repaying the sanctioned gold loan amount. The credit bureau then informs all the NBFCs and banks. This affects the credit score and thus hampers the chances of applying for a loan in the future. In addition, if the loan were granted, the interest rates would be higher than the usual interest rate.