Gold loan: All you need to know about repayment options

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Gold loan is a secured form of loan and its interest rates are lower than the interest rates of personal loan, making it a preferred avenue especially in times of financial stress. In any financial emergency, gold can get you a loan and help overcome the situation. The RBI in August 2020 raised the loan-to value (LTV) to 90% for banks on gold loans from the earlier 75% in the wake of the pandemic.

Amid the Covid-19 pandemic, demand for gold loans zoomed as households increased pledging of their gold holdings, mostly jewellery. According to data with the Reserve Bank of India, outstanding loans against gold jewellery given by banks rose 82% to Rs 60,464 crore as of March 2021, from Rs 33,303 crore as of March 2020.

Repayment options

There are two gold loan options that most banks are offering — gold loans with regular EMIs and gold loan with overdraft facility. But some banks and NBFCs offer another mode of repayment which consists of paying only the interest component. Therefore, before taking this loan you should know all of these three options.

1) Regular EMI

A gold loan with an EMI option is most common. In this case, to pledge your gold, you can visit the branch of your nearest bank or non-banking finance company. According to regulations, they would credit an amount in in your bank account with a regular EMI option for a reimbursement period.

According to the latest RBI guidelines, you can get a maximum 90% loan amount of your value of the gold pledged.

Interest rates

Among the banks, Punjab and Sind Bank offers the lowest interest rate of 7.00% on a Rs 10 lakh gold loan, with a reimbursement period of three years.

Bank of India (BOI) is offering the second cheapest interest rate on gold loans which is 7.30% per annum. On the other hand, Canara Bank is offering interest rate of 7.35%.

State Bank of India is currently offering gold loans at an interest rate of 7.5% per annum.

NBFCs charge comparatively higher interest rates between 9.24% to 12% per annum.

2) Overdraft facility

Gold loans with overdraft facility work like a credit card. When you pledge your gold to the lender, they open an overdraft account with a loan limit.

You are free to spend as and when you want to. The gold loan interest rate will be applicable only on the amount you use.

All leading banks offer gold loans with an overdraft facility to its customers.

In a gold loan with a regular EMI option, interest is charged on the entire loan amount even if you do not spend the sum immediately. But in the case of an overdraft facility, interest charges will be applicable only on the amount used.

So, in general, a gold loan with an overdraft facility may prove to be beneficial.

But the interest rates on overdraft facility is a bit more — at least by 50 basis points compared to the EMI loans.

3) Pay only interest

Some banks like ICICI Bank and NBFCs like Muthoot Finance and Manappuram Finance offer another mode of repayment.

“The customer can repay the interest component only at the end of the year and renew the loan for another year. He/she does not have to pay EMIs even,” said a bank official. Needless to say, the payout is less in this case. However, the loan lingers on.