Your Money: Choose a gold loan repayment option based on your cash flows

By: |
October 6, 2020 4:58 AM

However, non-servicing of the principal component every month can lead to the accrual of higher interest cost for the borrower.

As both the interest and principal components are repaid at the end of the loan tenure, the interest cost incurred on opting for this option would be the highest.

Gold loans have become popular due to benefits like quick disbursal, no restriction on end usage of funds and minimal or nil role of credit score during the credit approval process. Another crucial feature of gold loans is the availability of multiple repayment options. Unlike other loan options, most gold loan lenders offer other repayment choices apart from the standard EMI option.

Let us look at some of the gold loan repayment options.
Monthly servicing of interest only
This repayment option involves servicing the interest amount every month as per the EMI schedule, while the principal amount needs to be repaid on maturity of loan. The borrower will only be liable to pay the interest component during the loan tenure. This repayment option is suitable for borrowers lacking adequate cash flow or income to service both interest and principal components simultaneously.

However, non-servicing of the principal component every month can lead to the accrual of higher interest cost for the borrower. Hence, borrowers availing this repayment option should inquire with their lenders regarding the option and cost (if any) of servicing the loan’s principal repayment during the loan tenure. Doing so would not only reduce their interest cost, but also lower the burden of repaying the entire principal in lump sum at the end of the tenure.

Bullet repayment
Bullet payment option is one of the most commonly offered repayment options by gold loan lenders. It allows the borrower to repay both the principal as well as interest component in lump sum at the end of the loan tenure. Lenders usually levy interest on a monthly basis. While gold loan tenures range between three months to three years, those offered with bullet repayment option come with tenure of up to one year. This option is ideal for those who are not confident of their repayment capacity during the loan tenure. As both the interest and principal components are repaid at the end of the loan tenure, the interest cost incurred on opting for this option would be the highest.

Upfront interest payment
Under this option, the entire interest component is paid upfront at the time of loan disbursal while the principal component is repaid at the end of the loan tenure. The interest component is usually deducted from the loan amount during the loan disbursal. This repayment option is suitable for those who lack the capacity to make monthly repayment during the loan tenure but seek an option less costlier than the bullet repayment option at the same time.

Regular monthly EMIs
As with most loan facilities, lenders usually offer regular EMI options for the repayment of gold loans. As both the principal and interest components are serviced during the entire loan tenure, the interest cost incurred is lower than other repayment options. This option works best for those having stable cash flows and income certainty.

Borrowers should choose a gold loan repayment option based on their expected cash flows and income during the loan tenure. For instance, as the ongoing pandemic has adversely impacted the incomes of many, the non-regular EMI repayment options like the bullet repayment option can be suitable for those facing restrained cash flows. Those with income certainty and regularity should opt for the regular EMI option as it incurs the lowest interest cost vis-a-vis other repayment options.

The writer is head, Gold Loans, Paisabazaar.com

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