Gold loans have gained significant popularity as a convenient financing option. However, selecting the right repayment plan and avoiding common mistakes can save you money and stress. Here’s a simple guide to help you navigate gold loans effectively.
Why Gold Loans Are Popular
Gold loans offer flexibility and quick access to funds. They are backed by your gold as collateral, making them an attractive option for borrowers who need immediate financing. Flexible repayment plans, including daily, monthly, or term-end payments, make them appealing to different income groups.
However, the Reserve Bank of India (RBI) has raised concerns about some practices by banks and Non-Banking Financial Companies (NBFCs). Institutions must assess a borrower’s repayment capacity instead of solely relying on collateral guarantees.
Gold Loan Repayment Options
When choosing a gold loan, repayment flexibility is key. Here are the main repayment plans:
- EMI-Based Repayment
- How it works: Fixed monthly installments covering both principal and interest.
- Best for: Borrowers with a stable monthly income.
- Advantages: Low-interest costs and predictable payments.
- Bullet Repayment
- How it works: Pay the entire principal and interest at the end of the loan term.
- Best for: Individuals expecting a lump sum inflow, like a bonus or investment maturity.
- Advantages: No monthly payment burden during the loan term.
- Interest-Only Payment
- How it works: Pay only the interest monthly, quarterly, semi-annually, or annually. The principal is paid at the end of the term.
- Best for: Borrowers with irregular cash flow.
- Advantages: Lower monthly payments.
- Partial Repayment
- How it works: Make periodic payments toward principal or interest at your convenience.
- Best for: Borrowers with fluctuating cash flow.
- Advantages: Flexibility in reducing the debt burden early.
Tips for Choosing the Right Repayment Plan
- Match Your Income Cycle: If you have a stable income, opt for EMI plans. For unpredictable earnings, partial or bullet repayment might be better.
- Plan for Market Volatility: Banks and NBFCs may request additional gold collateral if gold prices drop significantly.
- Avoid Overborrowing: The RBI has capped the Loan-to-Value (LTV) ratio at 75%, ensuring responsible lending.
Common Mistakes to Avoid
- Choosing Unregulated Lenders
Stick to reputable banks or NBFCs to protect your gold. Unregulated lenders may offer seemingly attractive deals but charge exorbitant annual interest rates, sometimes as high as 24%. - Overlooking Interest Costs
Compare interest rates. Banks and NBFCs typically charge 8–12% annually, much lower than unregulated lenders. - Ignoring Gold Quality
Pledging low-quality gold may result in a lower loan value and can harm your credit rating in case of default. - Skipping Credit Score Importance
A good credit score can improve your chances of better interest rates and terms, even for gold loans.
Expert Insights
- Umesh Mohanan, CEO, Indel Money: EMI plans suit salaried individuals or those with regular incomes.
- Sahil Arora, Chief Business Officer, Paisa Bazaar: EMI plans have lower interest costs compared to non-EMI options.
- Adhil Shetty, CEO, BankBazaar: Bullet repayment works for those expecting a lump sum soon.
The Bottom Line
Gold loans are a great option when handled smartly. Choose repayment plans that align with your financial situation, stick to regulated lenders, and avoid common pitfalls. Proper planning and informed decisions can make a gold loan a hassle-free experience.