What Happens If Gold Loan Interest Is Not Paid on Time
Introduction
Gold loans are one of the most famous lending products in India. These loans have been one of the most sought for decades due to factors such as high demand for gold in the secondary market, consistent growth in the price, and easy availability of loans with high approval rates, and low cost as compared to traditional lending products such as personal loans.
- Brief explanation of how gold loans work
Gold loans are collateral backed loans, where the borrower’s gold serves as a collateral to secure a loan. The lender makes returns in the form of interest which is payable as per the loan schedule. Once, the borrower repays the entire outstanding including both principal as well as the interest, the lender gives back the possession of gold to the borrower. Since these are collateral backed loans, defaulting on gold loans can result in the lender liquidating the gold to recover the dues.
- Emphasis on regular interest payments as part of loan obligations.
Regular interest payment is absolutely essential with gold loans, as it allows the borrower to ensure that the obligation doesn’t pile up. Also, regular repayments help in enhancing credit profile. Failing to make regular payments may result in eventual default which can lead to loss of gold, as the lender reserves the right to liquidate the gold collateral to recover dues.
- Objective of the article
The objective of the article is to explain how the gold loan works, and the consequences of gold loan interest non-payment.
Structure of a Gold Loan Repayment
- Different repayment options: EMI, interest-only, bullet repayment.
Although typically many lenders offer only the monthly interest-only payment plan for gold loans, there are various other types of repayment plans. Let’s explore these plans and understand how these works:
EMI : EMI means equated monthly installments, in this repayment plan, the total outstanding including both principal as well as the interest component is divided into equal monthly payments across the loan term. It allows for a smoother repayment.
Interest-Only : In this repayment method, the borrower is supposed to pay only the gold loan interest overdue on a monthly basis, and repay the loan principal at the end of the loan term. This keeps the repayments lean during the term, and allows the borrower to make maximum use of the loan amount.
Bullet Repayment : In this repayment method, the borrower can make bullet payments towards the outstanding principal during the loan term.
- Role of interest payments in gold loan servicing
Interest payments play a crucial role in gold loan servicing, regular payments allows the borrowers to keep the total outstanding to on the lesser side, and helps with the headspace to arrange for the principal while only paying the interest. Paying the liabilities as per the gold loan schedule results in the timely closure of the loan.
Immediate Consequences of Missing Gold Loan Payment
- Late Payment Charges
- How these are calculated : Late payment charges are usually highlighted in the loan document. It is a prudent step to read the document carefully and find out for any hidden charges. As these charges, more often than not, end up inflating the actual cost of borrowing. indiagold offers gold loans with no hidden charges! All the applicable charges are clearly laid out in the loan document, and the borrowers can ask the representative as many questions about the charges as they like!
- Variation between lenders : Although the interest component charged by many lenders may seem identical or close, the additional charges such as late payment charges may vary by a great extent! It is recommended to the borrowers to always check the charges before availing a loan to get a fair idea on the possibility of the actual cost of borrowing.
- Increased Interest Accrual
- Compounding of unpaid interest : Although this is not a usual norm, some lenders upon accumulation of unpaid interest may add it to the principal due, and continue charging interest on the entire new principal. This essentially means that the borrower would be liable to pay interest on the unpaid interest.
- Impact on Credit Score
- Reporting to credit bureaus and long-term implications are severe for gold loan repayment failure. Since all loans are reported on the credit profile, any unpaid repayment reflects poorly on the borrower and implies irresponsible borrowing, which essentially contributes towards a decrease in the credit score, and makes it difficult for the borrowers to avail loan in the future.
Ongoing Default: What Happens If Delays Continue
- Multiple Reminders and Notices
- Phone calls, SMS, emails, legal notices : The lenders send reminders to pay the overdue using different modes of communication like phone calls, SMS, emails, etc. to ensure that the message reaches across to the borrower. If the reminders go unnoticed, or ignored, then the lenders may send legal notice to pay dues.
- Loan Classification as Non-Performing Asset (NPA)
- Typically after 90 days of non-payment : If the gold loan repayment stays overdue for over 90 days, then the loan is classified as non-performing asset by the lender.
- Loss of Ownership: Gold loan recovery through auctions
- How and when lenders initiate the auction process : Once the loans are classified as non-performing assets, and the borrower still doesn’t pay the outstanding, then the lender initiates the auction process.
- Notification process and timeframes : The official notification of auction with the dates, timeframe, and the details of the collateral is published. The buyers may bid in the auction, and upon successful bidding may get the gold.
Can You Get Your Gold Back After Missing Payments?
- Possibility of repayment before auction
Missed repayments do not always result in auction of the gold collateral. Even if the borrower misses a payment, he/she can still contact the lender, find out the total obligation including both missed payment, and penalties (if applicable) and make the payment to avoid default
- Penalties and total dues that must be paid
Gold loan interest payment rules may vary from lender to lender. In case of missed payments, it is prudent to check with the lender on the applicable penalty and pay-off the same. If the penalties are applicable, then it is imperative to pay the same without delays. It is one of the most common effects of not paying gold loan interest on time.
How to Prevent Default
- Understand the Repayment Schedule Clearly
More often than not, lack of awareness or understanding leads to borrowers in sticky situations. It is imperative to understand the repayment schedule clearly, as doing so can help avoid missed payments, and essentially penalty for gold loan non-payment, and a hit on the credit score.
- Set Payment Reminders or Auto-Debit
One can set their payment reminders to auto debit. By doing so, the dues will get debited automatically from the borrower’s bank account, without them having to place a manual instruction to process the payment.
- Maintain an Emergency Fund
Maintaining an emergency fund can help the borrowers have that extra cushion, so that if things go south and they’re not able to arrange the outstanding in time for repayment, they can dip into their emergency fund to service the outstanding. Emergency funds can also come in handy to do gold loan foreclosure.
- Communicate With the Lender Early
By communicating with the lenders, the borrowers may have a possibility of restructuring or grace periods in the loans which can help them pay-off the liabilities without having to face the gold loan default consequences.
- Avoid Over-Borrowing
Responsible borrowing is one of the biggest tips that the financial advisors give to the borrowers. By borrowing responsibly, the borrower can service their obligations efficiently without falling in the debt traps. Over borrowing in case of gold loans exposes the borrower to the detrimental impact of late gold loan payments like missed payments, increased obligations in the form of penalties, and a tanking credit score.
What to Do If You’ve Already Missed Payments
- Contact the lender immediately
By doing so, you would be able to understand your options to pay the obligation, and understand if any late fees are applicable or not.
- Request for rescheduling or partial payment plan
Requesting for rescheduling or a partial payment plan may work in your favour, as it can help you pay-off the debt obligation in a way that suits you the best. By doing so, you’d be able to repay the gold loan faster than you realise, without getting burdened under the debt.
- Seek financial counselling if necessary
Financial counselling can help align your obligations in a way that syncs with your income. This essentially assists with an efficient and cost effective way to repay the obligations and be more financially responsible.
