Gold loans are often taken in a hurry i.e. to meet medical needs, short-term shortage of money or sudden expenses. But, the real expense becomes known when it comes to repaying the loan. Many loan borrowers focus only on the interest rate and ignore the loan repayment method they have chosen. This choice silently decides how much money you will have to pay in the end.
Most common option: Pay only interest every month, principal later
This is the method that most lenders offer by default. You pay only the interest every month and repay the entire principal at the end of the loan tenure. It is lighter on the pocket as the amount paid every month is less. But there is a catch in this – the principal amount does not reduce. Interest continues to accrue on the entire amount throughout the tenure. If the loan tenure is extended or renewed, the total amount increases exponentially. This option works only when you are sure that you will repay the principal amount soon, and it will not be postponed indefinitely.
EMI option: Regular, but costs a little more every month
Some lenders also allow you to repay the gold loan like a normal loan – i.e., in the form of EMIs. The amount repaid in this manner reduces the principal amount along with the interest. This option helps you save interest, as the loan amount reduces with time. However, the amount paid every month in this option is slightly higher than the option that pays only interest. For people who have regular income, this is the most reliable and economical option.
Bullet Repayment: Easy, but risky if delayed
In this option, you do not pay anything during the loan tenure; You simply repay both the principal and interest at the end of the tenure. This sounds quite convenient – especially if you expect to get a large sum of money later. But, if the amount is not received on time as expected, then the accumulated interest can become a big burden for you. By extending or renewing the loan tenure, the expenses increase further. This option works only when you are absolutely sure about the loan repayment time.
Part-payments: An underrated way to reduce expenses
Even if you have taken an interest only or bullet repayment loan, you can still save a lot on interest by paying a part of the principal amount every now and then. Since gold loans often come with flexible loan repayment options, it becomes one of the easiest ways to save money. The sooner you reduce the principal amount, the more you will be able to save. In fact, which way saves the most money? There’s no single answer, but one thing is clear: methods that reduce principal quickly are almost always cheaper in the long run. Making EMIs or regular payments is better than methods that leave the principal amount untouched. The cheapest option is not the one which requires the lowest payment every month. Rather, the cheapest option is one in which the outstanding loan amount continues to reduce.
What mistake do most borrowers make?
The biggest mistake is that people choose the repayment plan as per their convenience without any clear ‘exit strategy’. It seems easier to make lower payments every month, so the loan quietly runs longer than scheduled. Over time, the burden increases without much progress in repayment. Gold loans are actually short term instruments. When these become long-term habits, they become very costly. Finally, saving money on gold loan does not mean looking for any specific scheme. What this really means is how fast you reduce the principal amount. The faster this happens, the less you will have to spend on the loan – it’s just that.