A gold loan is a secured loan that lets you use gold jewelry and coins as collateral. Based on the rules laid down by the Reserve Bank of India (RBI), a lender can give you up to 75% of the value of your gold. Since gold prices change every day, most lenders will figure out how much your gold is worth based on the market price of gold on that specific day. When prices are high, you may be able to get a higher loan amount against your gold jewelry at good prices. The interest rates on gold loans will directly affect how much you have to pay back. So, it is important to understand how gold loan interest rates are set and what you can do to get the lowest gold loan interest rate.
Interest Rates on Gold Loans
Gold loan interest rates range from 7% to 18%. The main things that affect the interest rate are the size of the loan and the borrower’s monthly income. The gold loan interest rate will be higher if you borrow more money. The interest rate will be lower if you have a stable, high income. The value of the loan is directly linked to how much gold you have. The purity of the gold doesn’t make a big difference in the interest rate. Some NBFCs and banks charge a foreclosure fee of up to 2%, not including GST, if you repay the loan before the pre-scheduled repayment period of 3–6 months. They also charge a minimum processing fee of Rs. 500, or 0.5%–2% of the loan amount.
Factors Affecting Gold Loan Interest Rates
There are many factors that affect gold loan interest rates. These are the following:
- Loan amount
Your lender will give you a gold loan based on the value of the gold you give them. The amount of the loan affects how much interest you pay. The interest rate goes up as the loan amount goes up. The typical loan-to-value ratio for lenders is 75%. This means that they will give you no more than 75% of the value of the gold you give them. The more you borrow from a lender, the more interest you have to pay back.
- Monthly pay
Gold loans aren’t the same as other personal and business loans in terms of what the borrower needs to do. In terms of other loans, the lender will assess everything related to your credit score, your job, and your business plans. But to get a gold loan, you only have to meet a small number of requirements. One of the things your lender will look at is how much money you make every month. The more money you make, the more a lender will trust you. The lender is sure that you will pay back the loan, so they charge you the lowest gold loan interest rate. But if you make less money, the lender might charge you a higher rate of interest.
- External lending benchmark rates
Your gold loan interest rate is based on the external benchmark that the lender’s interest rate is tied to. All loans approved by banks are linked to an external benchmark. When the Reserve Bank of India raised policy rates, the lender immediately raised interest rates. Still, when the Reserve Bank of India lowered interest rates, they didn’t change right away. The RBI asked the lenders to tie their interest rates to a benchmark from the outside world. That could be the yield on 10-year government bonds or the RBI repo rate. This rate will affect the interest rates on gold loans. The interest rate on gold loans will change every time the Reserve Bank of India changes its policy rates.
- Credit score
Along with your monthly income, your credit score is one of the aspects your lender will consider when determining your credibility. This score will reflect your loan repayment habits. The higher your credit score, the more confident the lender will be. This also means that the lender will offer you a lower interest rate because there is no doubt that you will repay the loan and avoid default.
How Do Gold Loans Interest Rates Affect Your Repayment Amount?
Gold loan interest rates will directly affect how much you repay the loan, which is true for all loans, not just gold ones. The repayment amount will be less if you opt for lower interest rates. A gold loan offers you two extra ways to repay the loan besides the EMI, unlike other types of loans. These strategies include periodic interest payments and bullet repayment. However, the gold loan interest rates will have an impact on the repayment amount regardless of which option you choose.
Consider a scenario where a person wants to choose a 2 lakh INR gold loan with a 12-month term. Let’s assume he takes out a gold loan with interest rates of 10% and 20%. A 10% annual interest rate would result in an EMI of INR 4,249 and an outlay of INR 54,965 for interest. On the other hand, if we use a 20% annual interest rate, the EMI will be INR 5,299, and the interest outlay will be INR 1,17,927. Therefore, if you choose a higher interest rate for a gold loan, you will have to pay an extra 1,000 per month as opposed to a lower interest rate of 10% annually. Similar to this, paying more interest means spending a lot more money. Therefore, choosing lower interest rates for your gold loan is advised.
Maximum Value of a Gold Loan
One of the most important factors is the loan-to-value ratio (LTV), which is set by the RBI and determines how much a borrower can borrow against the gold’s value. Banks can give out loans for up to 75% of what the market value of the gold ornaments is. For example, if the LTV is 75% and the value of the gold is INR 10,000, the most the customer can borrow is INR 7,500.
Before you apply for a gold loan, one of the first things you should check is the interest rate. Most people get gold loans, even though they have high interest rates, because it’s a fast way to get money. You shouldn’t be in a hurry to get a loan with a high interest rate. If the interest rate is higher, you’ll have to pay more each month.
Visit Piramal Finance for more information on gold loan applications, interest calculations, and much more.