Planning to take a gold loan? Put up extra collateral if demanded by lender

If LTV ratio on your loan exceeds the regulatory cap, lender can sell pledged gold to recover dues

Gold closed at Rs 44,663 per 10 grams on Thursday, down 20.1 per cent from the peak of Rs 55,901 scaled on August 7, 2020. While this is good news for those looking to buy the yellow metal, it’s an entirely different story for those who have taken a gold loan. They need to understand the consequences of falling prices and act promptly.

A large number of people took gold loans during the past year to meet financial emergencies. Adhil Shetty, chief executive officer (CEO), BankBazaar, says, “Gold loans are easy to get as they are secured loans.”

Owing to buoyant prices, borrowers were able to get a higher amount as loan. Also, the Reserve Bank of India (RBI) increased the loan-to-value (LTV) ratio from 75 per cent to 90 per cent.  V Swaminathan, CEO, Andromeda and Apnapaisa, says, “The RBI would have thought that people would be able to leverage a commonly held asset to arrange for liquidity during the pandemic.” However, with gold prices falling, borrowers will now face a new challenge. 

NBFC borrowers on safe ground

A lower LTV turns out to be a blessing in times when prices are correcting. George Muthoot, director, Muthoot Pappachan Group says, “We offer only 75 per cent LTV. We also limit the tenure to one year.” He adds that despite the price decline, the LTV for his customers would have gone up to 80 or 85 per cent at most.

While the RBI had allowed banks to offer up to 90 per cent LTV, gold-focused non-banking financial companies had to maintain an LTV of 75 per cent. So, if you have taken a loan from an NBFC, you would still have some margin left.

Can you transfer a gold loan?

Most lenders do not allow balance transfers of gold loans. “If you have an existing gold loan that’s very expensive, you would have to raise funds to close this loan, and then shift to a less expensive loan from another lender,” says Shetty.

A few lenders do offer this facility

“The transfer can be done by showing the pledge card of the original loan to the new lender who will do a fresh evaluation of the collateral, execute the paperwork, and effect the transfer,” says Swaminathan.

What should you do now?

Any correction in gold prices leads to an increase in the LTV ratio of a disbursed gold loan.

Ajay Mishra, head of gold loans, PaisaBazaar, says, “In case the LTV ratio exceeds the regulatory cap, the lender might ask the gold loan borrower to pay the exceeded LTV component — by either depositing cash or cheque, or by pledging more gold as collateral with the lender.”

Monitor gold prices and watch out for any communication from your lender in this regard. If a message comes, first try to negotiate for a breather. Three types of gold loans are given: normal EMI repayment, interest-only repayment (principal repaid at the end of tenure), and bullet repayment (where entire principal plus interest is repaid at the end of the tenure). Lenders may be more willing to offer a breather in the first two options and less in the third.

If you are not able to get a breather, arrange for additional funds. 

Failure to do so can lead to the loss of your precious asset as the lender has the right to sell your gold to recover dues. Try to take another secured loan like loan against fixed deposit or top-up home loan. As a last resort, take an unsecured loan like personal loan, which is costlier.