Falling gold prices may spell opportunities for some of you who are savvy investors and have a view on gold. But if you have a gold loan or a gold loan overdraft then your woes may have already begun with falling prices.
Gold loan lenders may have asked you for additional collateral or demand that you prepay a part of the loan (as the value of gold your pledged would have declined in value) or worse come, auction the pledged gold. The pain is more if you have a gold loan overdraft facility with banks.
Gold loan overdraft facility typically provide you with a limit (based on the value of gold you pledged, after providing for some margin) up to which you can draw funds. You will pay interest on the amount you overdraw. This is like any other overdraft facility but the overdraft limit will change based on periodic valuation of gold made by the bank.
That means if gold prices fall, your OD limit will come down and you would be asked to pay back any excess amount overdrawn. Such a scenario is being played out in recent times.
With gold prices falling sharply, overdraft borrowers, who borrowed to the hilt, have been asked to repay a part of the amount they withdrew from their earlier (higher) limit. Some banks charge as high as 18% p.a on the amount drawn in excess of the limit, once the OD limit is set lower after revaluing the gold.
Hence be wary when you availing gold loan overdraft facilities. Ensure that you are not overdrawing the entire limit at one shot. You may not be prepared to repay when any unexpected demand comes from your bank. Taking a personal loan to pay this will only land you in a tangled web of high interest rate loans.
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