What should you do, if asked by the Lender to Prepay the Gold Loan?
By Anupama Deshpande | Sep 26, 2018

As the name suggests, Gold Loan is a type of loan which is offered in lieu of gold ornaments. The Gold Ornaments are pledged by the Borrower to the Lender. The Lender can be a Bank or an NBFC which is authorized by the Reserve Bank of India (RBI) to offer Gold Loan. The loan amount can be used for business, personal expenses, education etc. The tenure for the loan starts from 6 months and can go upto 3 years.

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There are various options available for repayment of gold loan such as EMI Payment, Bullet Payment, etc., out of which the borrower is free to choose any one option as per his/ her convenience.

If the loan amount is not repaid then the customer is liable for paying the additional rate of interest. For the cases of persisting overdue, the gold is can be auctioned but only after giving advance notice to the borrower.

Up to March 2012, banks and NBFCs were allowed a loan-to-value (LTV) ratio of 80% to 95% which means that borrowers could get even up to 95% of the value of the gold collateral they pledged.

On the occasion of price of gold coming down, the worth of gold put up by gold loan borrowers becomes less than that at the time of extending the loan.

In such a situation, banks' or NBFCs' risk increases as some of the borrower may default and then they won't be able to recover even the outstanding amount after selling the pledged gold ornaments.

As per the terms and conditions for gold loan, if there is a drop in the value of the collateral, banks or NBFCs can insist on accelerated payments to safeguard their money. They can either ask for part payment of loan or full repayment of loan at once.

So as a preventive measure against collateral threat, lenders can ask the borrowers for prepayment of gold loan so that their risk can come down.

If there is a sudden & sharp drop in the prices of the gold then your lender can ask you to repay whole outstanding amount of loan immediately. You should know as to What should you do, if asked by the Lender to Prepay the Gold Loan?

In such a situation, the borrowers are advised to meet the branch manager of lending bank or NBFC and negotiate with them to get one of 2 options instead of repaying gold loan immediately:

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You can ask the lender to give you an offer of Part-payment of the outstanding principal amount, so that the LTV ratio becomes appropriate again (say LTV becomes 75% again)

You can ask the lender to give you an offer of pledging more Gold Ornament as Collateral against your outstanding Gold Loan, so that the LTV ratio becomes appropriate again (say LTV becomes 75% again)

You can discuss with the authorized executive of lending institution and explain your situation of unable to prepay whole outstanding loan amount at once, Then it is likely to work out a mutually agreeable solution, if you have never delayed the payment of EMI and hold a good credit score.