Gold Loan Repayment Options: Bullet Repayment vs EMI

Gold loans are gaining traction, especially because of its simple eligibility criteria, affordable interest rates compared to personal loans and quick disbursal process. With a gold loan, you can get quick access to funds by pledging gold as collateral. However, before availing of a gold loan, it's essential to understand the repayment options available. In this article, we will discuss two common methods of gold loan repayment – bullet repayment and Equated Monthly Installments (EMI) – and help you determine which one you should incorporate for better financial planning.

Gold Loan Repayment Methods Explained

When considering a gold loan, borrowers have several loan repayment methods, each with distinct features and benefits. Understanding these options can help borrowers choose the best fit for their needs.

1. Bullet Repayment

Bullet repayment is a method where you repay the entire principal amount along with interest at the end of the loan tenure. It is called "bullet" because the repayment happens in one go – more like lumpsum payment.

Let's understand this with an example:

Suppose you take a gold loan of ₹1 lakh with an interest rate of 10% for six months. At the end of the term, you repay the entire ₹1 lakh plus ₹5,000 in interest. This means you make a single payment of ₹1,05,000 at the end of six months.

Bullet repayment is suitable when you have a lump sum amount coming in at the end of the loan tenure, such as an annual bonus or investment maturity.

2. Equated Monthly Installments (EMI)

EMI is among the popular loan repayment methods for repaying various types of loans, including gold loans. It involves paying fixed monthly amounts that include both the principal and interest components.

Let's take the same example as above

Suppose you take a gold loan of ₹1 lakh with an interest rate of 10% for six months. Instead of making a lump sum payment at the end, you choose to repay through EMIs. Using an EMI calculator, the monthly installment would be approximately ₹17,500 (₹1,05,0006). EMI repayment is suitable when you have a steady income and prefer to spread out your repayments over a longer period. Now that we have understood both methods let's compare them in different scenarios.

Gold Loan Repayment Methods: Some Examples

Scenario 1: Salaried Individual

Rohan is a salaried individual who has taken a gold loan for emergency medical expenses. He receives a bonus of ₹50,000 at the end of six months and plans to use it to repay the loan. In this case, bullet repayment would be more suitable for Rohan. He can repay the entire amount in one go when he receives his bonus, saving on interest payments throughout the loan tenure.

Scenario 2: Business Owner

Priya runs her own business and has taken a gold loan to meet working capital requirements. She expects regular cash inflows from her business throughout the loan tenure. In this case, EMI repayment would be more suitable for Priya as it allows her to manage her monthly cash flows effectively.

Summary Comparison: Different Gold Loan Repayment Methods