gold loan

What You Should Know About Gold Loan Interest Rates

Interest Rate

Though it varies from lender to lender, the interest on the gold loan may range between 7.40% and 14.50%. It may be higher or lower depending on our gold purity, and other requirements that lenders may have.

The bigger the loan amount, the higher the gold loan interest rate you have to pay.  A regular and high income can help you bag a lower interest rate. The loan value is a direct function of the weight of your gold ornament.

If the gold ornaments are studded with precious stones, the weight of such added pieces will be excluded during the valuation process to determine the value of the gold pledged. 

The purity of the gold doesn’t influence the rate of interest to a large extent. “There is no direct correlation between the purity of gold and the rate of interest.

Factors Affecting Gold Loan Interest Rates

Price of gold in the market

If the price of gold is high in the market, the value of the gold ornaments or coins being pledged by you will also be high. Lenders will offer you a lower interest rate in such cases since the risk associated is low, and if, for some reason, you are unable to make the equated monthly instalments (EMIs), the lender can easily recover the outstanding amount by selling/auctioning the gold ornaments.

Inflation

If the rate of inflation is high, the value of currency depreciates and, hence, people tend to accumulate more gold. Gold acts as a hedge against inflationary conditions, especially when they persist for a longer period. This, in turn, pushes the price of gold higher, and at such a time, if you wish to avail of a gold loan, you may get lower interest rates from lenders.

Relationship with the Bank

Most lenders offer gold loans to their existing customers, though, in some cases, individuals who have no history with the bank can also avail of gold loans. However, existing customers of banks/lending institutions are typically in a better position to negotiate for a lower interest rate.

Loan Amount

The maximum loan amount one can avail is dependent on the weight of the gold jewelry and the prevailing price of the yellow metal. But how much one should avail should be a key consideration, as a higher loan amount also means a higher rate of interest.

So, just because you can borrow a larger sum, you shouldn’t avail of a bigger loan as that also pushes up the cost of servicing or the rate of interest on the same loan.

Income

While a gold loan is availed against a security, lenders still bake in the monthly income of the borrower to ascertain their repayment capacity and tune their rate of interest accordingly. If a borrower has a reasonably high monthly cash flow from salary or another source of income, one can benefit from a lower interest rate for the same gold loan.

Credit Score

One’s credit score doesn’t decide whether one gets a gold loan as the lender’s primary concern is the value of the security. However, the credit score still plays a part in the process as it affects the rate of interest offered by the lender. Usually, those with a credit score of 700 and above are seen as prized customers with a higher propensity to repay.

Benchmarking

Another aspect that affects the interest rate is external benchmarking. If a lender follows external benchmarking with the Reserve Bank of India’s repo rate-linked rate (RRLR), every time the central bank tightens its monetary policy, the interest rate being charged for a gold loan moves up.

gold loan maximum tenure

The gold loan maximum tenure is typically 24 months for long-term loans paid back in EMIs, or 6 months for short-term loans paid back in a single payment. If you want to pay off the loan monthly, you have up to 24 months to do so.

Gold loan interest rates are greater for larger loans. Regular income might decrease your interest rate. Gold ornament weight determines loan value.

By Michael Caine

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