Gold loans: Select repayment plan that perfectly matches your cash flows

Recent observations by the Reserve Bank of India (RBI) on risks linked to gold loans have led lenders to reconsider repayment structures and borrowers’ repayment capacities. Loans from regulated entities may in the future require repayment of interest and principal through equated monthly instalments (EMIs).

 

“One of the key unique selling propositions of gold loans is repayment flexibility – daily, monthly, or at the end of the tenure,” says Shaji Varghese, chief executive officer (CEO), Muthoot FinCorp.

 

Current repayment options

 

Gold loan borrowers have a range of repayment plans they can choose from.

 

EMI-based repayment: Borrowers repay through fixed monthly instalments, which include both principal and interest.

 

 

Non-EMI options: These can in turn take several forms:

 

Bullet repayment: The entire principal and accumulated interest are repaid in a single payment at the end of the tenure. 

 

Interest-only payments: Interest is paid periodically (e.g., monthly, quarterly), while the principal is paid as a lump sum at the end of tenure. 

 

Partial repayment: Borrowers can make periodic payments of principal and interest, reducing their balance at their convenience.

 

More variations can be available.

 

Choosing the right plan 

 

Borrowers must select a repayment plan that aligns with their cash flows. “The repayment plan should depend on the borrower’s repayment capacity,” says Umesh Mohanan, executive director and CEO, Indel Money.

 

An EMI-based plan suits individuals with regular income. “As EMIs comprise both interest and principal, the interest cost is lower than non-EMI-based plans,” says Sahil Arora, chief business officer, secured loans, Paisabazaar.

 

For those with irregular income, non-EMI options can be a better choice.

 

“Borrowers expecting a lump sum, such as a bonus or an investment that will mature soon, should opt for a bullet payment plan,” says Adhil Shetty, CEO, BankBazaar.

 

Varghese suggests matching the plan to income patterns. “A salaried person can choose EMIs, a retailer with daily income can choose the daily plan, and one with seasonal income can opt for bullet payments,” he says.

 

Evaluating repayment capacity 

 

Lenders can assess borrowers using tools such as credit scores. “The primary focus is on evaluating the gold ornament, determining its purity, and fixing the LTV ratio based on market risks,” says Mohanan.

 

To avoid default, borrowers should ensure their total monthly repayments do not exceed 40 per cent of household net income. “If the family income is Rs 1 lakh a month, total EMIs, including credit card payments, should not exceed Rs 30,000–40,000,” says Shetty.

 

LTV ratio ensures safety 

 

The RBI caps the LTV ratio at 75 per cent, safeguarding both lenders and borrowers. “The 75 per cent margin is safe for lenders and borrowers as we generally do not expect massive volatility in a year,” says Mohanan.

 

“Gold prices would have to fall very steeply for borrowers to come up with additional collateral,” adds Shetty.

 

Mistakes to avoid 

 

Borrowers should go with reputable lenders. “Take a loan from a known lender with a significant reputation in the business,” says Varghese. This ensures the pledged gold remains secure.

 

Unregulated lenders, such as moneylenders or jewellers, may offer seemingly attractive interest rates, but their annualised rates can be significantly higher. Remember that a monthly rate of 2 per cent translates into an annualised rate of 26.8 per cent, far exceeding the 10–12 per cent offered by banks and non-banking financial companies (NBFCs).

 

Finally, avoid pledging low-quality gold. “It offers less value and may impact credit rating (in case of a default),” says Mohanan.