We recently discussed how gold loans work and the increasing demand for such loans among borrowers. As gold loans are easier to process and grant, banks and non-banking financial companies (NBFCs) have come up with variants by altering the way such loans are repaid. Here are the gold loan repayment options.
Paying only interest monthly
This option involves repaying the interest amount as per the equated monthly instalment (EMI) schedule of the gold loan. The principal amount needs to be paid fully on maturity. Naveen Kukreja CEO & Co-founder of Paisabazaar.com says, “This repayment option works for borrowers lacking enough cash flow or income to service both the interest and principal components. The borrower is liable to pay only the interest during the loan tenure. On the flip side, lower repayments would lead to the accrual of higher interest cost for the borrower. Thus, borrowers taking this option should inquire with their lenders about the option and cost, if any, of making the principal repayment during the loan tenure. Making principal repayments during the loan tenure would reduce their interest cost as well as the burden of repaying the entire principal at one go at the end of the tenure.”
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How it works
Assume you have a gold loan of Rs 5 lakh for three years tenure. The interest rate on gold loan is, say, 7.50 per cent a year. During the loan tenure, you will pay monthly interest of Rs 3,125. Over three years, you will end up paying total interest of Rs 112,500. On maturity, you need to repay only the principal amount of Rs 5 lakh.
Regular monthly EMIs
This is a standard loan repayment option catering mainly to the salaried class that has monthly cash inflows. The repayment of principal and interest will commence from the month following the month of disbursement. Kukreja says, “This option works best for those having stable cash flows and/or income certainty. Regular servicing of the principal component right from the start of the loan tenure leads to lower interest cost than other repayment options.”
For instance, you will pay total interest of Rs 59,910 during the tenure of the gold loan, taking into consideration the above assumptions.
In bullet repayment, the bank charges interest on a monthly basis, but it will become due for payment along with principal only at the end of loan tenure. It is suitable for short-tenure gold loans of six months to one year. Gaurav Gupta, Co-founder and CEO of MyLoanCare.in says, “The banks may offer lower loan-to-value (LTV) and charge a higher rate of interest on bullet repayment loans. Also, you will end up paying higher interest on your bullet repayment loan as it is not a reducing balance loan.”
How it works
Assume you have taken a gold loan of Rs 5 lakh for a one-year tenure at 9 per cent a year with the bullet repayment scheme. During the tenure of the loan, you will not service the interest and principal to the lender. So, at the end of loan tenure, you will have to repay Rs 5.45 lakh, which includes Rs 45,000 as interest and Rs 5 lakh principal amount.
Making partial payments
In this repayment option, you can make partial payments to your gold loan lender whenever you have sufficient savings. Any lump-sum amount from selling dud investments or annual bonus from the employer can be used for the purpose. You don’t need to service the EMI schedule in this repayment option. The lenders allow you to make partial or complete payments of both the interest and principal components, irrespective of the pre-set EMI schedule. “The total interest is usually calculated daily on the amount of loan outstanding in this repayment option. So, if you repay your principal early on, the serviceable interest is reduced,” says Adhil Shetty, CEO of BankBazaar.com.
Monthly interest in overdraft accounts
Banks such as the State Bank of India and DCB Bank are offering overdraft facility against the pledged gold. These overdraft accounts have transaction facilities and monthly interest is to be served for borrowing the amount from the account.
Can I prepay / foreclose my gold loan account and charges applicable?
Yes, you can prepay your gold loan amount to the lender and close the account. Some of the banks do not charge for prepayment after three months of the sanction date. But, private banks such as AXIS Bank do charge borrowers between 0.5 and 2 per cent of the sanctioned amount during foreclosure, if the loan is repaid within 3-11 months from the sanction date.