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Three things to do when your lender demands prepayment on gold loan

If you know someone who's taken a loan against gold, there is a good possibility that your banks would have asked you to make a prepayment on your gold loan. According to an article published in E T Wealth today, the reason is as follows, "The reason is plummeting gold prices, which fell from Rs32,500 per 10 grams in September 2012 to below 27,000 in May 2013, a 17 percent drop. A NBFCs are within their rights to demand part payment or complete payment of a loan."

Another reason is that though the Loan-To-Value (LTV) limit for NBFCs have been decreased to 60 percent from the initial 80-95 percent by the Reserve Bank of India, it does not help the loans which were borrowed earlier.

 Three things to do when your lender demands prepayment on gold loan

Reuters

As a borrower you have a few options when the lender demands a prepayment on a gold loan. The article says, "The good news is that banks rarely resort to twisting the customers' arms as a start." It further adds, "Moreover, banks are wary of selling the collateral as it may not always fetch the outstanding amount. Besides the fact that organising the sale of collateral involves costs, gold jewellery also runs the risk of depreciating by 15-20% on making charges, if auctioned."

Banks would typically do two things. One, ask you to make a part payment towards to the principle amount of the gold, to maintain the proper LTV ratio. Second, they may ask you to increase the pledge collateral.

But what if you are stranded? What if you get a notice to part pay the loan, or completely pay the loan, but you are unable to do so? In such a case the article recommends that you let the bank know about you current situation and ask them to work out a solution which is a win-win solution to both parties. If you hold a good credit report, you could ask the bank for an additional grace period, but there is a good possibility that the bank may not really reduce you monthly due amount.

You can read the whole ET Wealth story here.

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Updated Date: Dec 21, 2014 02:29:30 IST