Gold loans are a popular choice among retail borrowers. From the lender's perspective, as these are secured and asset-backed loans, they are offered at lower interest rates compared to personal loans. Also, gold loans are easier to obtain, and there are no restrictions on their end use, making them versatile for both personal and business needs.
However, the RBI has put its scanner on gold loans recently. In a September 30 circular, it pointed out certain irregularities in granting loans against gold jewelry. This was because some issues were found in sourcing gold loans, valuations, due diligence before giving out the loan, and in the monitoring of loan to value (LTV) ratio, among others. Also, RBI found that rolling over gold loans with part payment was a matter of concern. In fact, the regulator wants gold loan companies to examine the repayment capacity of the borrowers and not just rely on the collateral. This is because in case the price of gold falls, the collateral value diminishes and that might be an issue for the lenders.
Monthly Payment Plans
Unlike other loans, gold loans traditionally require repayment as a lump sum at the end of the tenure, which can sometimes pose challenges for borrowers and increase the risk of default. “You can also keep paying the interest and make a bullet payment towards the principal or you can have the interest pre-deducted and repay the principal as EMIs,” says Adhil Shetty, CEO, BankBazaar, a fintech company.
However, now there are plans to provide monthly payment options. Here, the customer pays the interest and the principal in monthly EMIs as soon as the loan starts.
“Introducing monthly payment plans for gold loans offers a significant advantage, providing borrowers with the flexibility to repay in manageable installments. This reduces the financial burden of a lump-sum repayment and aligns with borrowers’ monthly cash flow, minimizing the risk of financial strain,” says Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, a loan aggregator.
Besides that, these plans typically cover both principal and interest, allowing borrowers to gradually reduce their outstanding loan balance. Additionally, regular payments promote financial discipline and can help improve credit scores. “Borrowers should, however, carefully review the loan terms, including interest rates and any associated fees, to ensure the plan is affordable and free from hidden costs,” says Raoul.
