Gold Loans have become a popular way to access quick funds at lower interest rates, with outstanding loans reaching several lakh crores. Since gold is pledged as collateral, defaulting on repayment carries serious consequences. Knowing what happens in case of default is essential before borrowing.
What Are the Consequences of Defaulting on a Gold Loan?
Here is what will happen if you default on your Gold Loan:
1. Auction of Pledged Gold Jewellery
The gold jewellery serves as collateral for the amount of money you borrow from the lender. The lender is therefore entitled to recover what is owed to it by selling the pledged collateral to cover the outstanding Gold Loan amount. Once your loan account is classified as a default, the lender has the right to auction your pledged gold jewellery or coins to recover dues.
2. Loss of Ownership
Once an auction is underway, you may lose your valuable gold jewellery or other assets that hold personal or sentimental value. You will permanently lose ownership of the jewellery or ornaments. You cannot reclaim it once it has been auctioned.
3. Impact on Your Credit Score and Credit History
The default will be reported to credit bureaus due to non-repayment and will impact your CIBIL score and overall credit profile. A low credit score will affect your ability to get a loan in the future.
4. Additional Interest
Gold Loan default is also subject to late payment charges or penalties. These charges can be expensive and are based on the number of delayed months. These charges can add up to a significant amount, exceeding the actual outstanding loan amount.
5. Restriction on Future Borrowing
Your relationship with lenders becomes strained if you default on your loan repayments. Lenders may refuse to lend you money to borrow money in the future or offer loans with higher interest rates and more restrictive criteria.
What Happens to the Pledged Gold After Default?
The lender has the legal right to auction your gold. However, a lender cannot auction it right away because it must follow the necessary recovery processes. Understanding these processes enables you to act quickly and explore options to avoid losing your gold in the event of a default.
Reminder and Grace Period
If you have missed a scheduled loan repayment, your lender will reach out to request payment. If you continue to fail to make payments, your lender will send you a final notice. Your lender will also provide you with a grace period during which you can make a payment and avoid being subject to auction.
Auction Process According to Guidelines
If you do not repay the loan within the grace period, the lender will initiate the auction process. It will be done in accordance with Reserve Bank of India (RBI) guidelines, which mandate a maximum Loan-to-Value (LTV) ratio of 75% and transparent valuation of purity and weight before auction. The proceeds will be used to recover the dues.
Settlement of Surplus Balance
As per RBI guidelines, any surplus proceeds must legally be returned to the borrower if the auction value exceeds the loan dues. If the value of the gold at auction does not equal the total amount owed, lenders may seek to recover additional funds.
Final Opportunity to Prevent Auction
Most lenders, in line with RBI rules, provide a final communication and opportunity to repay or restructure before auction. Being proactive in communicating will help prevent your gold from being put up for auction, as lenders assist in such situations.
How to Prevent a Gold Loan Default
Take proactive steps to protect your pledged gold and avoid default:
1. Choose a Tenure with Affordable EMIs
Pick a repayment period that fits your budget while considering the impact of monthly interest. Short tenures mean higher EMIs but lower interest; longer tenures reduce EMIs but increase total interest.
2. Understand Interest and Penalties
Review interest rates and charges before signing. Knowing these helps you plan and avoid surprises.
3. Pay on Time
Track due dates and set reminders. Timely payments prevent penalties and protect your gold.
4. Explore Flexible Repayment Options
Ask about restructuring or partial payments to reduce overdue amounts and avoid default.
5. Communicate Early with Your Lender
If repayment seems complicated and you are struggling with your repayment obligations, inform your lender promptly. Early communication can lead to solutions such as grace periods and help prevent auction risks.
Read Also: Foreclosing Gold Loans: A Guide to Foreclose a Gold Loan
To Conclude
One of the best ways to protect your gold from default is to apply for a loan amount that you can repay comfortably. This responsible borrowing not only frees your monthly budget from additional burden but also ensures timely repayment and protects your valuable asset. Besides all these, it prevents any circumstances that may lead to default.
Poonawalla Fincorp offers an affordable Gold Loan for all your financial needs. Apply for a Gold Loan now to unlock its value and get up to ₹50 lakhs.
FAQs
What is a Gold Loan Default?
Defaulting on a Gold Loan occurs when the borrower fails to repay the loan within the agreed-upon repayment duration.
Can lenders auction my gold if I do not repay?
Yes, after the grace period ends, the lender can auction the pledged gold to recover the outstanding loan balance.
How does a Gold Loan default affect my credit score?
When a borrower defaults, the default is reported to the credit bureaus. This can negatively impact your credit score and prevent you from getting loans in the future.
Can I stop the auction process if it has already been initiated?
Yes, a borrower can stop an auction that has started by paying the overdue balances. They can also request assistance to restructure the loan before the final auction date.
What should I do if I am unable to pay my Gold Loan dues?
If you are unable to pay your loan payments, reach out to your lender as soon as possible and request a restructuring of your loan. You can also make a partial payment to alleviate the financial burden of defaulting.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply