Taking out a gold loan can provide quick access to funds in times of financial need. A gold loan is a secured loan where you pledge your gold jewellery as collateral to borrow money from financial institutions like banks or NBFCs (Non-Banking Financial Companies).
The financial institution appraises your gold ornaments and sanctions a loan of up to 75% of the pledged gold's market value. However, it is critical to understand how to repay a gold loan responsibly. This beginner's guide will explain the basics of gold loans and repayment methods.
How Does Gold Loan Repayment Work?
When you take out a gold loan, the lending institution will hold your gold ornaments or jewellery as collateral while you pay back the loan amount plus interest in instalments over the loan tenure. The loan provider will assign a specific loan-to-value (LTV) ratio, which is the amount you can borrow against the current market value of your gold.
For example, if the market value of your 100 grams of gold jewellery is ₹50,000 and the lending company offers an LTV of 75%, you can avail a maximum loan amount of ₹37,500 (75% of ₹50,000).
As you pay back the loan instalments, your loan provider will reduce the outstanding amount while still holding your gold as collateral. Once you repay the entire loan amount within the specified tenure, the financial institution will return your gold ornaments to you. Failing to pay the instalments on time may lead to penalties or auctioning of your gold collateral.
Why is it Important to Choose an Ideal Repayment Option?
Gold loans offer easy access to funds with minimal documentation and quick approval based on gold collateral. However, flexible repayment can lead to complacency.
Making repayments casually without considering financial capabilities leads to missed instalments, capitalising interest, and debt traps. Eventually, borrowers risk losing pledged gold collateral.
Hence, adequate planning and selecting the repayment method prudently aligned to individual financial situations is critical for smooth and timely gold loan repayment. The flexible options make informed repayment planning even more important.
Gold Loan Repayment Options
Gold loans allow borrowers to choose a repayment structure aligned with their financial situation and income stability. The major options for repayment of gold loan available are:
1. Interest Servicing
- Pay only interest component as EMIs over the loan tenure
- Repay the principal lump sum at maturity, along with any unpaid interest
- Reduces monthly burden, but overall interest cost is higher
2. Bullet Repayment
- Repay principal + all accrued interest in one go at maturity
- No repayments during the tenure
- Convenient if monthly instalments are difficult
- Attracts the highest interest cost
3. Principal and Interest EMIs
- Fixed EMIs covering principal + interest
- Principal reduction with every instalment lowers interest cost
- Disciplined repayment suitable for regular income
4. Prepay Interest Upfront
- Pay all interest as a lump sum upfront
- Repay only principal at maturity
- Saves interest cost compared to bullet repayment
- Needs ready access to a large lump sum
5. Part Prepayment
- Prepay part principal anytime as a lump sum or multiple payments
- Lowers overall interest and maximum repayment period for gold loan
- Flexible aligned to funds availability
The suitable option for repaying a gold loan depends on the borrower's income stability, fund availability, interest cost sensitivity, and financial discipline. Evaluating the pros and cons of each method carefully can help borrowers make an informed repayment choice.
How to Select the Best Repayment Option
The suitable method of repayment of gold loan for you would depend on the following:
- Loan tenure: Longer tenures allow more repayment flexibility. For tenures above 1 year, interest servicing or part prepayments work better.
- Income stability: Those with steady monthly incomes can comfortably opt for regular EMIs. Irregular income earners can look at other options.
- Funds availability: If you can access a large amount, prepay interest upfront or opt for part prepayments during the tenure. Otherwise, interest servicing is preferable.
- Interest cost: EMIs and upfront interest payments help minimise interest outgo over the tenure. Interest servicing and bullet repayment attract higher interest.
- Financial discipline: Options with no instalments require discipline to accumulate funds for repayment. EMIs enforce regular payments.
Analyse your cash flows, income stability, funds availability, and interest cost savings potential to pick the ideal repayment structure for your gold loan. Consider the pros and cons of each method carefully.
Conclusion
Gold loans offer flexible repayment options for borrowers to align with their cash flows and income. Consider your financial situation, interest cost benefits, income stability, repayment discipline and other factors to pick the right method. Make regular payments and utilise part prepayment, if possible, to optimise interest burden.
Follow prudent repayment of gold loan practices to have a rewarding borrowing experience. With the right repayment plan and discipline, you can safely repay your gold loan and retain your precious gold within the tenure.
FAQs
1. How soon should I start planning for gold loan repayment?
It is best to plan your repayment approach even before taking out the loan. Analyse your cash flows, income, expenses, interest cost sensitivities, etc., to pick the optimal method.
2. What if I miss my gold loan EMI?
Late EMIs can attract a monthly penal interest and negatively impact your credit score. Avoid missing EMIs.
3. Is part prepayment allowed on a gold loan?
Yes, most financial institutions allow part prepayment without charges. It helps reduce your interest burden.
4. Can I switch between repayment structures during my loan tenure?
Yes, most financial institutions allow switching between interest servicing, EMIs and prepayments based on changing cash flows during the tenure.
5. What documents do I need for the repayment of gold loan?
Typically, you won't need any additional documents to repay your gold loan. The lender already has your original gold jewellery and necessary identification details. However, it's always a good practice to check with your specific lender as they might have additional requirements or procedures.
