Can You Prepay Your Gold Loan Without Penalty?

Gold loans are a great way to handle a financial emergency or a lack of funds. One can give gold jewellery or gold coins for a pre-decided time to a lender (a bank or an NBFC) and receive a loan amount in return to be paid later with interest. Gold loans have helped people receive quick funds to manage health emergencies or get funds for a marriage or for education purpose.

Gold Loans

Another great thing about gold loans is that one can also choose to prepay the loan taken against gold partially or in full. That means, if you have taken a gold loan, the lender will have some option for you to either prepay some of the loan amount borrowed or entirely pay the amount before the due date. Based on whether the payment is partial or complete, the gold items can also be taken back.

Gold Loan Prepayment Penalty

Now, if you consider prepaying a gold loan, there might be some penalty charged by the lender. The lender can be a bank or an NBFC (Non-Banking Financial Company). When it gives you a gold loan, it also gives you a schedule for the payment of the principal with EMIs (equated monthly instalments). When you choose to prepay the loan, the lender incurs some loss, for which it may charge some penalty.

When you partially pay the amount of gold loan, it is referred to as gold loan prepayment. When you fully pay the outstanding amount well before the due date, it is then referred to as gold loan foreclosure.

Penalty Charges on Gold Loan Prepayment

Upon prepayment, the financial institutions usually charge a nominal processing fee, in addition to a prepayment penalty of 2% - 5% on the outstanding principal.

It is not necessary for the lenders to charge a penalty amount. One needs to check the terms of the gold loan agreement with the lender to understand how the prepayment penalty applies. Loan documents can be referred to for this information.

Hence, whether you can prepay your gold loan without penalty or not varies, depending on the financial institution you have borrowed the gold loan from. Because the terms and conditions vary from bank to bank and among the several NBFCs, you are required to know the specific terms to make the decision regarding prepaying/foreclosing the gold loan.

You may also like "What Happens If You Don't Repay Your Gold Loan?"

What Other Things to Consider Before Prepaying/Foreclosing A Gold Loan

Penalty charges, in addition to the chargeable processing fee, is one of the things you need to consider before choosing to prepay the loan. However, that's not the only consideration you need. Here are some other notable points:

• Whether or not foreclosure is allowed, especially when there have existed delays or defaults in EMI payments
• If there are charges applicable for prepayment/foreclosure, how would the total payable amount be affected
• Choose a proper time period for the prepayment/foreclosure when trying to avoid paying additional interest
• Paying the principal along with all dues right away, so as to avoid further interest charges
• Get permission and acknowledgement for the prepayment/foreclosure before you remit the amount
• Also, consider restructuring of the loan to see if it suits better than prepayment/foreclosure, especially when you need funds due to financial hardships

Benefits of Prepaying a Gold Loan

Gold loan prepayment or foreclosure come with various advantages.

While there may be some processing fee charged along with some penalty to compensate for the loss of interest for the lender, there are perks to be enjoyed.

For the borrower, the option to prepaying a gold loan may reduce interest costs, improve his/her financial management and also let the loan close sooner. When you get to close the loan early, you can also retrieve the pledged gold sooner. Gold loan prepayment helps you consolidate debts and improve financial stability.

Besides these, there is peace of mind and freedom from stress, having reduced debt obligations and improved financial security. It may even help you improve your credit score.

Depending on the method of loan payment (prepayment through multiple partial payments or foreclosure via a single lump-sum payment), the total cost of the loan can be significantly reduced.

Once the gold loan is settled, one can use the retrieved jewellery again for another gold loan.

Final Thoughts

One may choose to prepay a gold loan when funds to close the loan are available before the expected time, when a reduced credit limit is required, or when the borrower no longer needs the loan.

Decide on going with a prepayment or foreclosure after taking expert advice and getting thorough information about the consequences. The prepayment may be done online or offline.

Recent article "Should You Take a Gold Loan from NBFCs or Banks?"

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