Maximising Savings: Comparing Gold Loan Repayment Methods

While taking a gold loan is easy, how you repay it matters even more. The repayment method you choose can save or cost you thousands in interest.

The right option depends on your income, financial plans, and repayment capability.

Source : Freepik

Gold loans are one of the quickest ways to access funds in need. All it takes is a few hours, no extensive paperwork or standing in queues. This convenience is one of the biggest contributing factors to the surge in gold demand in 2024, which jumped to 56 per cent as per the Moneymood report. 

While taking a gold loan is easy, how you repay it matters even more. The repayment method you choose can save or cost you thousands in interest. The right option depends on your income, financial plans, and repayment capability. Let’s look at the different repayment choices and how to pick the one that works best for you.

Equated Monthly Instalments (EMIs)

EMIs are the standard repayment method where you pay a fixed amount each month, covering both principal and interest. Since interest is calculated on the reduced loan balance, this method is structured, predictable, and helps with monthly budgeting. It’s ideal for salaried borrowers with a steady income and brings in moderate savings. 

Bullet repayments

Bullet repayments involve repaying the entire principal and accumulated interest in one shot at the end of the loan term. This method is suited for borrowers expecting a future lump sum, but it is expensive as interest continues adding on the full principal for the loan term. 

Interest-only payments

Here, you only make interest payments every month while the principal is repaid at the end. This helps keep your monthly payments low, but without the principal reduction, your interest burden remains high. Overall, this is an expensive option that is best for those with short-term money liquidity issues but the certainty of funds later. 

Part-prepayment

Part-prepayment is a flexible option where you can pay extra towards the loan whenever you have spare cash, allowing you to reduce your principal and interest. It is suitable for borrowers with fluctuating but modest incomes, like freelancers or small business owners. This method is among the most effective ways to save on interest payments and even close your loan faster.

Foreclosure

You repay the full loan before the end of its term. Most lenders allow this after a lock-in period of three to six months and some may charge a small fee as well. However, the interest savings usually outweigh the penalty. Foreclosure is another cost-effective method to reduce your loan burden and works well for borrowers who have surplus funds to pay off the loan early. 

Which repayment option saves the most?

Foreclosure is the cheapest option because you only pay interest for a part of the tenure before clearing the loan. Part prepayment is also cost effective as it can help you save on interest costs. However, bullet repayments and interest-only repayments are more expensive since the principal stays the same for a longer time, meaning you pay interest on the full amount for a longer period.

For gold loans, in particular, your repayment choice influences your borrowing costs. Each repayment strategy is designed to suit different financial situations and income patterns. What’s key is identifying the strategy that suits you best to keep your interest costs low.  

(The author is the Senior Manager-Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)