What happens if you default on a gold loan? Consequences explained

A gold loan is one of the simplest secured loan alternatives in India that allows borrowers to use their gold coins or jewellery as collateral to meet an urgent expense. However, if the debt is not serviced it may harm you greatly. Let’s find out in detail what happens if you do not repay a gold loan on time and why it matters.

What is a gold loan default?

When a borrower does not clear their loan as per the scheduled calendar i.e. fails to pay their EMIs, fails to pay the interest, or fails to pay the total principal by the end of the term, it is known as a gold loan default. Gold is a security for the gold loan, but non-payment can lead to adverse financial and legal impacts.

Immediate consequences of defaults

1. Charges: Penalty charges for default are tagged on to the outstanding balance. Interest accrues over time, which makes it all the more difficult to make repayment.
2. Effect on credit score: Your credit rating will take a penalty for any late payment that gets raised with credit rating agencies.

Legal repercussions and auction proceedings

If after a grace period, usually 30 to 90 days of default, lenders may begin collection proceedings:

• Gold auction: Lenders can recover the unpaid balance, by putting the pledged gold up for public auction. Usually a prior legal notice is utilised to convey the information.
• Loss of ownership: The moment your gold goes under the auction hammer, you no longer own it. If the auction price exceeds the amount you owe, the surplus is returned; if it is less than you owed you could still be liable for the shortfall.
• Legal action for outstanding balance: In limited scenarios, the lender may also take legal action for the outstanding balance, if the gold value is significantly lower than your total liability.

Impact on future borrowing

Defaulting on a gold loan impacts the view of banks and NBFCs negatively on you; even if you pay back your overdue gold loan you may have a poor repayment history which can have repercussions in the future when trying to apply for credit cards, personal loans, or home loans and it may also result in elevated interest rates on loans.

Is there a way to recover from default?

So, if you are struggling financially, consider taking the steps below before it's too late:

1. Renegotiate loan restructuring: Speak to the lender and explain your situation. Some lenders have alternative payment options in the form of amended repayment terms or extended tenure.
2. Pay partial dues: You can mitigate the auction process or avoid penalties by making a partial payment toward your overdue loan.
3. Opt for loan transfer: In order to prevent defaulting on your loan, you may want to think about transferring the gold loan to another lender if there are better terms available to keep you from defaulting at one lender.

Preventive measures to avoid default

• Only borrow money on loans you can afford to repay.
• Choose a realistic length of time to borrow.
• Know key dates and save your money so you can make a timely repayment.
• Consider getting insurance on your gold loan in case of unforeseen circumstances.

In conclusion, defaulting on a gold loan does not only lead to the loss of your gold. That event sets in motion a chain of legal and financial events, which may limit future borrowing options. Always borrow responsibly, read the loan agreement, keep in communication with your lender in case challenges arise in repayment.

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