Gold Loans: Choose a Repayment Plan That Fits Your Cash Flow

Gold Loans: Choose a Repayment Plan That Fits Your Cash Flow

Gold loans are a popular borrowing option, especially for those looking for quick, hassle-free funding. One major reason for their popularity is the flexibility in repayment options. But with the Reserve Bank of India (RBI) emphasizing the importance of managing risks tied to gold loans, borrowers and lenders alike are reconsidering how these loans are structured. In the future, regulated lenders may lean towards offering equated monthly installment (EMI) plans for better financial stability.

Let’s explore the repayment options available and how to choose the one that best aligns with your income flow and financial goals.

Understanding Gold Loan Repayment Options

Gold loan borrowers have multiple repayment plans to choose from, offering flexibility to suit different financial situations.

1. EMI-Based Repayment

This is a straightforward option where you pay a fixed amount every month, which includes both the principal and the interest.

Best for: Salaried individuals or those with steady monthly incomes.

Example: If your loan amount is ₹1,00,000 at 12% interest for one year, your EMI would be approximately ₹8,885. Over the tenure, you’ll gradually pay off both the interest and the principal, reducing your overall interest cost.

2. Non-EMI Options

These provide flexibility but can lead to higher overall costs if not managed well.

Bullet Repayment: Pay the entire principal and accumulated interest at the end of the loan term.

Best for: Borrowers expecting a lump sum payment soon, such as a bonus or investment maturity.

Example: Suppose you borrow ₹1,00,000 for six months at 12% interest. At the end of six months, you’ll repay ₹1,06,000 in one go.

Interest-Only Payments: Pay the interest periodically (monthly or quarterly) and the principal as a lump sum at the end.

Best for: Borrowers with irregular income but regular expenses.

Example: If you borrow ₹1,00,000 for a year at 12% interest, you’ll pay ₹1,000 each month as interest and the principal at the end of the tenure.

Partial Repayment: Make payments towards the principal and interest whenever convenient during the loan tenure.

Best for: Small business owners or freelancers with fluctuating incomes.

Example: Borrow ₹1,00,000 and pay ₹50,000 mid-tenure to reduce your interest burden.

How to Choose the Right Plan

The key to selecting the best repayment plan is understanding your income pattern and repayment capacity.

For Regular Income: An EMI plan is ideal as it spreads your repayment evenly and minimizes total interest costs.

For Irregular Income: Non-EMI options, such as bullet payments, work well if you anticipate receiving lump sums. For example, a seasonal shopkeeper who earns heavily during festivals can time their repayments accordingly.

Custom Solutions: A salaried individual might prefer EMIs, while a retailer with daily cash flow might opt for daily or weekly payments. Seasonal income earners could choose a bullet payment plan to match their earnings.

“Borrowers should pick repayment plans that mirror their cash flow,” advises Umesh Mohanan, CEO of Indel Money. Matching your income pattern to the repayment schedule can prevent financial strain and avoid defaults.

Lenders and Repayment Safety

Lenders typically assess repayment capacity by evaluating your credit score, household income, and the gold’s value. The RBI caps the loan-to-value (LTV) ratio at 75%, ensuring both borrower and lender are safeguarded. This means if your gold is worth ₹1,00,000, you can borrow up to ₹75,000.

“Ensure your total EMIs, including credit card payments, don’t exceed 40% of your household net income,” suggests Adhil Shetty, CEO of BankBazaar. For instance, if your family earns ₹1,00,000 monthly, keep total EMIs under ₹40,000 to maintain financial stability.

Common Pitfalls to Avoid

1. Choosing Unregulated Lenders: Stick to reputable banks or NBFCs. Unregulated lenders may lure you with lower upfront interest rates but charge exorbitant annualized rates. For instance, a monthly interest rate of 2% translates to an annual rate of 26.8%, far exceeding the 10-12% offered by banks.

2. Pledging Low-Quality Gold: Gold of inferior purity offers less loan value and may affect your credit score in case of default.

3. Over-Borrowing: Borrow only what you need. While your gold may fetch a higher loan amount, stretching your repayment capacity can lead to financial stress.

Final Thoughts

Gold loans are a lifeline for many, offering quick funds and repayment flexibility. However, choosing the right repayment option can make a big difference in the overall cost and ease of repayment. Whether you’re a salaried employee, a small business owner, or someone with seasonal income, there’s a plan to suit your needs.

Plan wisely, repay diligently, and safeguard your pledged gold to ensure a seamless borrowing experience.