Typical Duration of a Gold Loan

1. Introduction

• What is a gold loan? A gold loan is a type of asset-backed loan where the borrower pledges their gold assets to the lender in order to avail a loan. The commercials of gold loans are similar to any other type of loan, where the borrower repays the loan amount with the applicable interest rate as per the loan schedule. Once the loan is repaid in full, including the principal, interest and any applicable charges, the gold collateral is given back to the borrower.

• Why is loan duration (tenure) an important factor for borrowers? Loan duration (tenure) is an important factor for the borrower as it means the timeframe within which the borrower is supposed to repay the loan to the lender. A shorter term may not be very beneficial for the borrower since the repayment liability is near, and vice versa.

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2. What Is Gold Loan Tenure?

• Definition of loan duration: Loan duration is the term or timeframe for which the loan will remain active, and after which the loan is supposed to be closed. Upon the completion of the loan term, the balance is supposed to be paid to the lender.

• How tenure affects repayment and interest costs: Tenure is the duration within which the loan is supposed to be repaid in full. Now, the loan amount is not dependent on the term of the loan. Which means that if the term is short, then the repayment will be higher and vice versa.

3. Typical Gold Loan Duration Range

• Common tenure range offered by lenders: The most common tenure offered by lenders in the gold loan space is 1 year. However, the term largely depends on the selection made by the borrower and the offering by the lender. The borrower can check the available options with different lenders and make a decision accordingly.

• Short-term vs. medium-term loan options: Lenders often offer short-term as well as medium-term gold loan repayment period options. The borrower can choose the option which aligns with their repayment capacity and strategy.

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4. Factors That Influence Gold Loan Duration

• Loan amount: The Loan amount often doesn’t, but depending upon the lender and the borrower's profile, may impact the repayment tenure. For loans of a lower amount, the lenders usually offer short-term loans, and for a gold loan of a high amount, the lenders typically offer a long-term gold loan. This, however, can be modified at the time of application depending on the borrower’s choice and repayment schedule.

• Type of repayment plan (EMI, bullet payment, overdraft): Lenders offer various types of repayment plans. Plans such as EMI - Equated monthly instalment, where the borrower repays a fixed sum to the lender, which has both principal as well as interest component, and at the end of the tenure, the loan is repaid in full. Lenders also offer a bullet payment plan, where the borrower can make regular interest payments and occasional additional payments towards the principal, which decreases the interest.

• Lender policies: Lender policies have a major impact on the gold loan duration. Lenders, for whatever reason, may impact gold loan duration. This can be attributed to lender risk exposure appetite and other factors.

• Customer profile and needs: Customer profile and needs also have a major impact on the gold loan duration. If the profile is less than desirable, then the duration might be less and vice versa. Also, if the borrower's need is geared towards a short-term requirement, then the loan tenure will be shorter and vice versa. This, however, largely depends on the lender’s policy. Hence, it is crucial to select the right lender like indiagold whose policies are geared towards customer centricity!

5. Repayment Options and Their Impact on Duration

• EMI-based tenure: EMI-based tenure is one of the most famous repayment options available to borrowers. Using this, the borrower first defines the maximum EMI that they’d like to pay every month, based on which the term of the loan is determined, which can help repay the entire liability, including the principal, interest and other charges effectively while being within the monthly EMI limit.

• Bullet repayment (single payment at the end): With a bullet repayment plan, the borrower is supposed to repay the interest component every month and repay the outstanding principal at the end of the

6. Can You Extend or Shorten the Gold Loan Tenure?

• Renewal options: if the borrower fails to repay the loan in full, then they can choose to renew the loan with the leftover amount. A new loan agreement is made with the principal amount being the carry-forward amount from the previous term loan.

• Prepayment and foreclosure possibilities: One good thing about gold loans is that the borrower can choose to make a prepayment, as and when they have an influx of cash. Doing so releases the borrower from a part of the liability. If the borrower wishes to repay the entire outstanding, then they can opt for a foreclosure of the loan and close the loan before the loan term ends.

7. Choosing the Right Duration

• How to decide the ideal tenure based on income: Borrower’s income is one of the best indicators that can help decide the ideal tenure. As loan tenure and the amount of repayments are inversely proportional, it is prudent to choose the tenure based on the income and how much the borrower can afford to pay at each repayment. It is prudent to take the maximum tenure decision based on your affordability.

• Cost differences between short vs. long tenure: Short-term and long-term loans come with a cost difference. Even if the interest rates are component, the borrowers end up paying a higher amount in interest payments if it is a long-term loan and vice versa.

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