Renewing a gold loan seems like an easy fix when your payment is due and you don’t have enough cash to close the loan. However, if gold prices drop, renewing might cost you more than you expect.

How Falling Gold Prices Affect Your Loan

The maximum amount you can borrow depends on the current market value of your pledged gold. The Reserve Bank of India (RBI) sets strict Loan-to-Value (LTV) limits:

• Up to Rs 2.5 lakh: You can borrow up to 85% of your gold’s value.
• Rs 2.5 lakh to Rs 5 lakh: Up to 80%.
• Above Rs 5 lakh: Up to 75%.

You must maintain these limits throughout the loan. When gold prices fall, the value of your pledged gold drops, but your debt stays the same. This increases your LTV ratio.

Example: Suppose your pledged gold was originally worth Rs 8 lakh and you borrowed Rs 5 lakh. If the market value of your gold drops to Rs 6.5 lakh, your Rs 5 lakh debt now takes up a much higher percentage of your gold’s worth.

Important Things to Know Before Renewing

1. Renewal is not debt freedom: Renewing simply extends your debt. You will still owe interest, processing fees, and renewal charges under the new agreement.
2. Gold will be revalued: Lenders value your gold using recent market prices (based on the lower of the 30-day average price or the previous day’s closing price).
3. You may need extra cash or extra gold: If gold prices fall significantly, your loan might exceed the allowed LTV limit. The lender can ask you to pay off a portion of the loan in cash or provide additional gold as security to bring the ratio back into balance.
4. Risk of losing your gold: If you cannot pay the required difference or fail to clear the debt, the lender has the legal right to auction off your pledged jewellery after sending you a notice.

Checklist for Borrowers

Before renewing a gold loan, make sure to check:

• The total amount owed: Calculate all current dues, new interest rates, and renewal fees.
• Cumulative cost: If you have renewed the loan multiple times, calculate how much total interest and fees you have paid so far.
• Repayment plan: Ensure you can realistically repay the full amount within the new loan period.
• Backup savings: Keep some cash set aside in case gold prices drop further and the bank asks for an immediate partial payment.

Do not look only at whether the lender is willing to extend your loan. Always consider your gold’s updated value, total borrowing costs, and your ability to pay back the money before signing a renewal.