Summary of this article
Loan default leads to notices, then possible jewellery auction
Borrowers get time to repay before gold is sold
Extra auction amount after dues is returned to borrower
Gold loans are taken by pledging gold jewellery to banks or non-banking financial companies (NBFCs) in exchange for money. The jewellery is returned once the loan is completely repaid. However, if the borrower fails to pay back for a long time, the lender can take measures to collect the money by selling the gold.
When A Gold Loan Becomes A Default
A gold loan is defaulted if the borrower fails to pay the loan amount or interest within the stipulated period. Some loans require monthly interest payments, while others are settled at the end of the tenure.
In most cases, lenders first send reminders, usually after 30 days of non-payment, through calls, text messages, emails, or letters. There is typically a grace period of 30-90 days for borrowers to pay off their dues. One must keep in mind that failure to pay one equated monthly instalment (EMI) does not trigger auction.
Borrowers should ensure that their updated and correct contact number is given to the lenders for prompt communication.
If the loan is not paid at the end of the term, it is considered a loan default.
How Such Auctions Work
Lenders are required to notify the borrower before selling the gold, or putting it on auction. A written notice is sent to the borrower containing important information, such as the amount due, interest rate, fees or penalties, and date of the auction.
Borrowers are given time to repay their dues even after the notice is sent; borrowers have legal rights to clear their dues at any point before the actual sale is completed. Once the outstanding principal, interest and applicable penalties are paid, the jewellery is returned.
If the dues are not cleared even after 90 days and repeated reminders, the lender can legally auction the pledged gold to recover the dues. The auction price is linked to the market value of gold. If the sale proceeds exceed the dues then the surplus proceeds are returned to the borrower.
Impact On Credit Score
If the lender reports missed payments to credit bureaus, a gold loan default can have a negative impact on the borrower’s credit score, marking him as a risky borrower. A lower score could make it tougher for the borrower to secure loans in future and he/she may not be able to get loans at a lower rate of interest.
Before taking a gold loan, borrowers should be aware of the interest rates, repayment duration, and the guidelines of the auctions. It is preferable to communicate with the lender early and avoid default if it becomes difficult to pay.
Gold loans are a good option when you need cash urgently, but if you do not pay the loan back on time, then the jewellery that you pledged is put up for auction.
FAQs
1. What happens if the auction price is higher than my loan amount?
Any extra money, after clearing the loan dues, is returned to the borrower.
2. Can I get my gold back after receiving an auction notice?
Yes. If you repay the full dues before the auction, the jewellery is returned to you.
