Prudence in Taking Gold Loan: Rules to follow

Overview:

India is one such country which invests a huge amount in gold. We have adopted this practice from our parents who always believed that gold is a wise investment. They invested in gold to ensure that they have enough for their daughter’s marriage, further studies, etc. However, the investment goal and borrowing purpose on gold gradually changed.  Today, most of the people who have gold borrow on the same to clear other dues and loans.

Considering this, RBI has now set strict rules when it comes to borrowing on gold. In the latest notification, RBI stated that the loan-to-value (LTV) ratio for Gold loan should be 60%.This collateral value will be valued after taking an average of the closing price of 22 carats. If the purity of the jewellery that is pledged is less than 22 carats, then gold financiers like Mannapuram Finance and Muthoot Finance will have to convert the collateral into 22 carats and value it proportionately.With the latest norms, people will find it difficult to raise money against gold. The situation is worst now because the price of gold has fallen above seven % since past one year.

Now the question here is why such restriction?

Off lately, it was seen that since borrowing against loan was easy (80% on the gold value), people were misusing the same completely. They used to borrow on jewellery and close claim with other borrowers. The reason behind this can either be excessive borrowing or less income. Even if a person is able to borrow on gold, he/she will have to return the amount borrowed on the due date. Apart from this, the interest on gold will also keep haunting each month.

A sincere advice to all those people who manipulate their finance in the similar ways is – It is better to sell jewellery rather than pledging and borrowing on the same.This is just going to increase the burden of repayment. If you wish to have peace of mind and less stress, then sell the jewellery if you are in dire need, but avoid such manipulative borrowings on jewellery.Considering all these, RBI came up with strict laws on lending on gold. If your requirement is really high, then it is wise to borrow on fixed deposits, life insurance policy, and mutual funds rather than on gold.

Updated: November 25, 2016 — 5:37 pm

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