Should You Opt For A Gold Loan With EMI Or Overdraft?
I. Introduction
- Brief overview of gold loans in India (or relevant market)
Gold holds a great significance in India, both in terms of finances as well as culturally. This has led to the emergence of micro-economies in both formal as well as informal sectors. These micro-economies have also led to huge demand for gold in the secondary market, which makes the price levels of gold pretty stable. Hence, due to the stable price levels and consistent demand, gold has also emerged as a preferred choice as a collateral for the lenders to relay loans.
- The growing popularity of gold-backed credit
Gold backed credit or gold loans have been a really famous form of lending in India since many decades! Previously the majority of market share was distributed amongst the lenders in the informal sector such as private money lenders or jewellers. Ever since the emergence of lenders in the formal lending sector, the gold loan market has become extremely popular due to the lender’s ability to market their attractive schemes, as well as an enhanced competition between the lenders has led to much more growth in the popularity and amazing customer-centric schemes in the gold loan market!
- Introduction of the two primary repayment options: EMI-based loans vs. Overdraft (OD) facility
Gold loans are extremely simple lending products, where the borrower pledges their gold to the lender to avail a loan, and pay interest as a cost of availing the loan. However, many lenders offer different forms of gold loan repayment methods to the borrowers to enhance borrower’s convenience. A borrower can avail an EMI based gold loan, or also make use of the overdraft facility. Choosing between EMI and overdraft for gold loan can be tricky, hence it is important to understand what these truly mean.
In the EMI based structure, the borrower avails a loan, the gold loan interest rates, and loan tenure is determined at the time of contract basis which a total liability is calculated which includes the payable interest, principal, and other charges spread evenly across the repayment tenure in fixed monthly installments.
Another option for the borrowers to avail loans is to avail an overdraft facility from their lender. In this, the lender earmarks a total funds as a line of credit to the borrower. Which as per the borrower needs can be availed whenever their account balance is completely used up. This ensures that there is sufficient capital available at all times, and the borrower can service their commitments in a timely manner. The interest is charged only on the amount availed, and not the total earmarked amount.
- The purpose of the article
The purpose of the article is to help readers decide which repayment option suits their financial situation best, which can essentially help in servicing the liability more efficiently, and avoid financial load on the individual while being able to service on their commitments.
II. Understanding Gold Loans
- Definition of a gold loan
Gold loans are collateral backed lending products where the borrower collateralizes or gives custody of their gold as a security deposit to the lender to avail a loan. This gold collateral acts as a way for the lenders to minimize their risk exposure associated with landing to the lender. The borrower is supposed to repay the entire principal due along with applicable interest as well as any other charges stipulated in the loan contract, once the borrower repays the loan in full then the lender shall give back the custody of the borrower’s gold back to the lender.
Gold loans are a great form of securing a loan especially for borrowers with a new credit profile, or for people who have a less credit score which makes it unfeasible for them to avail unsecured loan. Another great thing about gold loans is that these loans are relatively fast and easy to secure, and are often more cost effective when compared to traditional lending products such as personal loans.
- How gold loans work (collateral, loan-to-value ratio, tenure, interest rates)
In gold loans, the borrower secures a loan from the lender by collateralizing their personal gold. This gold serves as a tool or security for the lender to minimize their risk, as they reserve the right to liquidate the gold to recover any outstanding in case of non-repayment or default by the borrower.
There are other factors like loan to value ratio (LTV), tenure, and interest rates which come into play and are influential to the terms and conditions of the loan.
- Common reasons people opt for gold loans (emergencies, business, education, etc.)
Gold loans are an extremely convenient way to secure funding. The stand-out feature of gold loans is that these are fairly easy and quick to avail. Lenders like indiagold provides quick processing, and funding release within 30 minutes, which is a great feature of convenience, especially since the borrowers may need to avail quick funding for urgent purposes such as emergencies, business commitments, as well as education! There is no restriction on the ultimate use of the funds. The borrowers may utilize these funds as they may seem fit, obviously not for carrying out illegal activities!
III. What is a Gold Loan with EMI?
- Explanation of EMI (Equated Monthly Installments)
Equated monthly installments (EMI) is a type of loan repayment where the total payable amount is calculated i.e. total amount including the principal, interest, and any other applicable charges and is spread across the repayment tenure into equal monthly installments, such that at the end of the tenure there is no outstanding to be repaid by the borrower to the lender.
EMI mode of repayment helps in repaying the entire loan liability in equal amounts slowly over the tenure, this decreases the load of principal repayment on the borrower, and provides convenience and decreases the chances of default.
- Structure: principal + interest repaid monthly
In EMI mode of repayment, the total amount including the principal, payable interest, and applicable charges is added up and spread across the repayment tenure equally in the form of monthly payments.
- Features:
- Fixed or floating interest rates : The interest component in the EMI mode of repayment can either be fixed or floating. In the fixed interest rate, the rate of interest is fixed at the start of tenure and remains constant throughout the loan tenure. In floating interest rates, the rate of interest is pegged against an underlying rate with some markup for the lender. As and when the underlying rate changes, so does the applicable rate of interest on the loan.
- Set tenure : One great feature of the EMI based loan is that the loan has fixed tenure, i.e. the repayment is spread across the tenure, and there would not be any demand from the lender to repay the amount early. This gives much needed comfort with repayment, as the borrower can plan their repayment as per the fixed tenure, make timely repayments, and essentially decrease the chances of default.
- Regular monthly obligations : EMI based loans present a fixed monthly obligation to the borrower. This monthly obligation is fixed at the start of the loan, and is dependent upon factors such as the principal, applicable charges, interest rates and the tenure of the loan.
- Pros:
- Predictable payments : One of the biggest advantages of gold loan EMI (Equated monthly installments) style of repayment is that the repayments are predictable and constant. This can be of massive help to the borrowers as it can help them plan their expenses efficiently, to ensure that they’re able to service the repayment without any hiccups.
- Useful for long-term financial planning : EMI based repayment plans are also favorable for long term financial planning. This is because the repayments are constant, predictable, and at the end of the loan tenure there is no residual commitment to close the loan account.
- Cons:
- Prepayment penalties (in some cases) : Since the EMI based repayment plan, has monthly repayments including both a component of principal as well as interest, it can boost the total payable amount, which may put some strain on the borrower and result in missed repayments and penalties on the same.
- Less flexible : Unlike bullet repayment structure, the MEI based repayment structure is less flexible for the borrowers. The monthly liability is fixed, and there is no wiggle room to pay partial liability, or only the interest component for the month!
IV. What is a Gold Loan with Overdraft Facility?
- Explanation of the OD method
Overdraft facility or OD facility is a lending facility extended by the lenders to the borrowers, where a fixed amount of funds are earmarked for the borrowers to utilize. As and when the borrower needs a loan, they can simply dip into the overdraft and avail funds. The interest is only applicable on the amount which has been availed by the borrower and not the entire earmarked amount.
- How it works: sanctioned limit, interest on used amount only
As mentioned earlier, Overdraft facility is a form of line of credit, where the lenders extend a maximum fixed amount of credit line, and the borrower can avail the amount as and when they need it. The borrower is not liable to pay any interest on the entire earmarked funds rather only the funds they withdraw from the line of credit. This saves time for borrowers who often require lending support.
- Features:
- No fixed EMI : One of the biggest features of the overdraft facility is that there is no fixed EMI. The borrower is only liable to pay interest on the amount that they’ve withdrawn from the overdraft account, and repay as and when they have the funds. Till then the interest will continue to be charged.
- Withdraw and repay flexibly within limit and tenure : Another great feature of the over draft facility is that the borrowers can withdraw and repay the amount within the prescribed limit as many times and as often they wish and need the funds.
- Pros:
- High flexibility : Overdraft repayment method provides much needed flexibility to the borrowers. They can avail as much funds within the prescribed line of credit, as often they need. This is a great feature for the borrowers who are in business of high volumes, and need cash often, as it eliminates the need to apply for a fresh loan every time there is a loan requirement.
- Pay interest only on the amount used : This is one of the biggest PROs of the overdraft facility. Even though the funds are earmarked for the borrower, and they can avail funds within the limit any time they need, the interest is only applicable on the loan amount that has been availed. Lets understand this with an example - Lets suppose a lender extends an overdraft facility of INR 10 lakhs to a borrower, and the borrower only requires INR 2 lakhs, in this case, the borrower is only liable to pay interest on the INR 2 lakhs that they;ve availed, and not the entire amount of INR 10 lakhs.
- Cons:
- Can lead to misuse if not disciplined : Quite often, an easy availability of funds can lead to irresponsible borrowing patterns by the borrowers which can lead to financial difficulty. If the borrower is not disciplined, then they can misuse the funds or use it irrationally rather than responsibly.
- Unpredictable interest outgo if poorly managed : Gold loan overdraft is essentially a line of credit against your gold collateral, as much you avail, the more interest rate is applicable. If the overdraft account is not managed well, then this can lead to unpredictable outflow of the funds, which can lead to poorly managed finances, and essentially financial loss.
V. Key Differences Between EMI and Overdraft Options
| Feature | EMI | Overdraft | | ----- | ----- | ----- | | Repayment structure | Fixed monthly payments | Flexible repayment | | Interest calculation | On full loan amount | Only on utilized amount | | Financial discipline | High | Requires self-discipline | | Best suited for | Fixed expenses, planned repayment | Irregular income, short-term needs |
VI. Factors to Consider Before Choosing
- Your income stability : Considering one’s income stability is extremely important before opting for any sort of borrowing. As the repayment needs to be serviced from your earnings. Failing to do so can lead to financial loss in the form of penalties, and in extreme cases - the loss of collateral. Hence, considering income stability can help with making responsible lending and financial decisions.
- Nature of your financial need (one-time vs. recurring) : Based on the nature of your financial need can you choose a product that more aligns with your requirements If it is a one time financial need, then you can opt for a gold loan, however if you see your requirement to be recurring, then a gold loan overdraft facility can really help!
- Discipline with credit and repayments : Financial discipline with credit and repayments is extremely important, as these have far more complex implications than one considers. Being irresponsible with borrowing and repayment, can lead to added financial pressure in the form of penalties, and moreover the negative effect on the credit profile of the borrower. This can lead to increased difficulty in availing future loans.
- Interest rate comparison : Interest rate is usually the highest contributor to the total cost of borrowing for any form of loans. Before making a borrowing decision, it is important to consider the interest rate, and compare lenders based on the interest rate offered by them. Lenders like indiagold offers highly attractive interest rates in gold loans starting at just 0.85%* per month!
- Tenure flexibility and prepayment options : tenure flexibility can provide an unmatched peace of mind to the borrowers. Having the option and flexibility with repayment options, and the tenure can be a blessing in disguise, as it helps with repaying the loan liability more efficiently.
VII. Which Option is Better for You?
- Ideal borrower profile for EMI option
Borrowers who would like to have predictability, and can consistently produce repayment amount over the loan tenure are ideal candidates for the EMI option. Example - Employees who require loans to service an emergency, or an urgent requirement, the EMI option would most suit among all available gold loan repayment options.
- Ideal borrower profile for Overdraft option
People who have a loan requirement on a recurring basis, and would like to have the safety net using which they can quickly avail a loan, the gold loan options with overdraft facility is ideal for such borrowers. Example - Entrepreneurs, or business owners who have recurring credit requirements to fulfill their business commitments.
