Your money: choose a gold loan repayment option based on your cash flow
Gold loans have become popular due to advantages such as quick disbursement, no restrictions on the end use of funds, and minimal or no role of credit score during the credit approval process. Another crucial feature of gold loans is the availability of several repayment options. Unlike other loan options, most gold lenders offer other repayment choices besides the standard EMI option.
Let us examine some of the gold loan repayment options.
Monthly interest service only
This repayment option involves servicing the interest amount each month according to the EMI schedule, while the principal amount is to be repaid when the loan matures. The borrower will only be required to pay interest during the term of the loan. This repayment option is suitable for borrowers who do not have sufficient cash or income to repay interest and principal simultaneously.
However, the non-service of the principal component each month can result in the accumulation of higher interest charges for the borrower. Therefore, borrowers who take advantage of this repayment option should inquire with their lenders about the option and the cost (if any) of managing the loan principal repayment over the life of the loan. This would not only reduce their interest charges, but also reduce the burden of repaying all of the principal in a lump sum at the end of the term.
Refund by bullet
The bullet payment option is one of the most common repayment options offered by gold lenders. It allows the borrower to repay both principal and interest as a lump sum at the end of the loan term. Lenders typically charge interest on a monthly basis. While the duration of gold loans varies from three months to three years, those offered with the option of repayment in fine have a term of up to one year. This option is ideal for those who are unsure of their repayment capacity during the life of the loan. Since interest and principal are repaid at the end of the loan term, the interest charges incurred by opting for this option would be the highest.
Advance payment of interest
Under this option, the entire interest component is prepaid at the time of loan disbursement while the principal component is repaid at the end of the loan term. The interest component is usually deducted from the loan amount when the loan is disbursed. This repayment option is suitable for those who do not have the capacity to make a monthly repayment during the term of the loan but are at the same time looking for a less expensive option than the option of repayment in fine.
Regular monthly NDEs
As with most loan facilities, lenders usually offer regular EMI options for the repayment of gold loans. Since both principal and interest are repaid over the life of the loan, the interest charges incurred are lower than with other repayment options. This option works best for those with stable cash flow and income certainty.
Borrowers should choose a gold loan repayment option based on their expected cash flow and income over the life of the loan. For example, as the ongoing pandemic has negatively impacted the incomes of many people, non-regular EMI repayment options like the in fine repayment option may be suitable for those facing limited cash flow. Those with a secure and regular income should go for the regular EMI option, as it carries the lowest interest charges compared to other repayment options.
The writer is the head of Gold Loans, Paisabazaar.com