Gold loan repayment:
EMI, bullet and what the gold is worth

How a gold loan is sized and priced

A gold loan is a secured loan: you hand over ornaments or coins to the lender, they are valued by weight and purity, and you receive a sum that is a percentage of that value. The percentage is called loan-to-value, or LTV, and the regulator caps it. The cap has been changed from time to time and can depend on the size of the loan, so check the current ceiling with the lender before you plan on a figure.

Valuation uses the gold content only. Stones, wastage and making charges are ignored, and purity is tested on the spot. A 40 g ornament of 22-carat gold is worth much less to a lender than its retail price suggests, because the lender prices pure gold at a rate close to the market rate for that day, minus a safety margin.

Interest is quoted per year, but how it is charged depends on the product. Some lenders charge monthly on the outstanding principal, some add up simple interest and collect it at the end, and a few compound it. The repayment style matters as much as the headline rate, which is why the comparison below holds the rate constant and changes only the schedule.

Working out how much you can borrow

Remember that the lender's rate per gram is below the jewellery shop's rate, and the lender may deduct processing and valuation fees from the disbursed amount. The sum that reaches your account can therefore be a little under the sanctioned loan, while interest runs on the full amount.

A lender may also publish a rate per gram that applies on the day, which is the number that decides the loan. If that rate is revised, a re-valuation at renewal can raise or lower the amount you are eligible for, even though your jewellery has not changed.

EMI repayment: interest on the falling balance

In an EMI plan you pay the same amount each month, and each payment covers that month's interest first and reduces principal with the rest. Because the balance falls, interest falls too.

Bullet repayment: pay at the end

A bullet plan means you pay nothing, or only interest, until the end of the term, and then repay the principal in a single sum. It suits people expecting a lump of money, such as a crop sale or a bonus, and who want the gold back after a short period.

Take the same ₹3,00,000 at 9.5% for 12 months. If interest is simple and collected at maturity, it is ₹3,00,000 × 9.5% × 1 year = ₹28,500, and you repay ₹3,28,500 in one go. If the lender asks for interest monthly, you pay ₹2,375 every month and the principal at the end; the total interest is still ₹28,500.

EMI saves ₹12,839 here, because after the first month you no longer pay interest on principal you have already returned. The price is a heavier monthly instalment.

What happens if the gold price falls

LTV is measured on the day you borrow. Afterwards the gold price moves while the loan stays the same. Suppose gold falls 20% after you borrow ₹3,00,000 against ₹4,00,000 of jewellery. The collateral is now worth ₹3,20,000, and the loan is 93.75% of it.

Lenders usually set a trigger LTV above which they ask for a part payment, extra gold or a top-up. If the ratio stays above the trigger they can auction the pledged gold after notice. Under an EMI plan the principal declines each month, which gradually restores the cushion; under a bullet plan it stays at the full amount until the end, so the risk lasts longer.

• Borrow below the maximum if you expect to hold the loan for a long time.
• Ask when and how the lender values the gold for margin calls.
• Keep the pledge receipt and the valuation certificate until the gold is returned.
• Check for part-release options if you repay a portion and want some ornaments back.

Choosing between EMI, interest-only and bullet

The cheapest plan in rupees is not always the right plan. Match the schedule to the way money actually reaches you. A salaried borrower with a steady income is usually better served by EMI, which reduces the principal automatically and removes the temptation to keep rolling the loan over.

A farmer or trader who expects a single large receipt in six months may reasonably prefer a short bullet loan. On ₹3,00,000 at 9.5% for 6 months, simple interest is ₹14,250, and the single repayment is ₹3,14,250. An EMI over the same six months would cost ₹51,395 a month, a heavy outflow when income has not yet arrived.

A third group borrows for a bridging need, such as a fee deadline or a medical bill, and expects to clear the loan within weeks. For them the daily or monthly interest and the absence of a prepayment penalty matter more than any multi-month comparison.

• Steady monthly income: EMI.
• Lump-sum income on a known date: bullet or interest-only, with the end date written down.
• Very short need: choose daily-balance interest and no foreclosure fee.

Costs beyond the interest rate

• Processing fee, often a percentage of the loan, charged upfront.
• Valuation or appraisal charges, and insurance or storage fees in some cases.
• Penal interest on late payment or on exceeding the tenure, which can be higher than the normal rate.
• Foreclosure or part-payment charges, which vary by lender and product.
• Auction terms, including notice period and what happens to any surplus.