What happens if you default on your gold loan?

A gold loan is a secured loan with moderate conditions that allow even borrowers with low credit score and history to apply

Ravish Gupta

Gold loan is one of the most popular ways to borrow funds and has been part of society for centuries. Lower interest rates, easy processing, 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, compared to other loans. Typically, a 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 the tenure, and six months in case of short-term loans repaid in lump sum.

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A gold loan is a secured loan with moderate conditions that allow 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 repayments can have multiple consequences that vary from case to case. Even the action taken on defaulted borrowers varies 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 auction

In case the borrower does not repay the gold loan amount in full within the stipulated time frame and get 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 auction, borrowers must honour 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

Lenders may charge a penal rate of interest on borrowers who fail to make timely payments. It is subject to the amount that is due, starting from the day of the repayment date. The penal interest is usually charged at the rate of 3 percent p.a. to 12 percent p.a., and differs from lender to lender. Gold loan lenders offer the freedom to choose the repayment method, according to the 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.

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There are multiple 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.

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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 does not need to worry about following an EMI (equated monthly interest) 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 borrowers in the loop about possible contingencies. A borrower must assess the repayment ability and discuss the repayment schedule with the lender to either reset or adjust.

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Impact on credit score

Although there is no relation between credit score and the sanction of gold loan, failure to repay can have a bearing on the same. Gold loan companies in India usually send a notice to the credit bureau regarding the failure of repayment. The credit bureau then informs all NBFCs and banks. This affects the credit score and thus hampers the chances of applying for a loan in future. If at all a loan is granted, it would be at a higher interest rate.

Ravish Gupta is Business Head – Gold Loan at Capri Global Capital