The gold loan is the most secured type of loan because it provides enough security to the lender. After giving a loan against gold, the lenders don’t have to worry about its repayment much because they know they have the collateral gold to recover the entire loan amount. But there are occasions when the lenders ask the borrowers for full repayment of the loan or a part of it. These situations arise when the market sees high fluctuations in the price of gold and the Loan-To-Value (LTV) ratio gets disturbed. The LTV ratio is the percentage of the loan amount that can be lent to a borrower against the gold. The RBI has instructed the banks to keep the LTV ratio to 90%, and Non-Banking Financial Institutions to 75%. But to earn more profit, some companies distribute higher loans than the LTV ratio and when the prices of the gold get corrected, they ask the borrowers for prepayment of the loan to avoid any loss in the market.
In these cases, the lending institutions might say that if prepayment of the loan has not been done, they will sell the security. But it does not usually happen. The main reason that stops the bank from taking this step is that they won’t always get the adequate amount from selling the collateral gold. The prices of the gold change daily and there’s always a risk of depreciating in the value of gold. So if the LTV ratio is very less, then lenders might not get the loaned amount after selling the deposited gold. Also, there are other costs involved in the process when the lenders try to sell the collateral. These costs can also depreciate up to 15-20% if they sell in an auction.
Here are three things that you can do if the lender is asking for prepayment of the Gold Loan:
Ask for some time
If the lender sends you a notice for prepayment, the first thing that you can do is asking for some time. Don’t hesitate while taking this step. Write back to the lending institution, or go to their office and meet them in person. Make them aware of your problem and inform them why you can’t repay the loan amount immediately. There are good chances that the lending institution will understand your problem and give you some time to arrange money.
It is a plus if you have a good credit score. It will make the lenders trust you even more and they will feel freer while offering you an additional grace period.
Paying only interest monthly
A good option for the repayment of the loan in these cases is repaying the interest amount as per the scheduled equated monthly instalment (EMI). This will save you from the burden of paying EMI and the principal amount at the same time. You can easily pay off the principal amount after the maturity of the loan.
The method works best for those who do not have enough cash flow to pay the interest and the principal amount. But while opting for this method, asks the lender if there is any higher interest rate that you have to pay for making the principal amount payable after the maturity of the loan.
Making partial payments
Another method for prepayment of the loan is making partial payments for both interest and the principal amount. The method gives a great advantage for loan repayment whenever you have the money to repay it. You can either repay the amount in one go or you can also save some amount of money and pay little by little. It does not matter how much you’re paying each time. The amount can be more or less, depending on your savings.
In this method, the total interest is calculated daily on the outstanding loan amount. This means that if you repay the principal amount early, you can get the benefit of a reduced interest rate.
You will lose your gold only in case you become entirely unable to pay back the loaned amount. But if you are constant with your payment, you are in a good spot.