A gold loan is certainly a quick way of raising funds, and several individuals choose it for the same reason. But repayment of this easy-to-acquire loan is also a vital aspect to be considered. And, for this, the gold loan interest rate is a highly critical factor.
These rates have a direct impact on the loan repayment amount. Hence, every potential applicant must be aware of the various aspects surrounding these rates.
Gold loan interest rates in the Indian markets: An overview
While a number of financial institutions extend gold loans in India, the gold loan interest rate varies across them. Therefore, potential applicants must check out multiple lenders before finally choosing one.
This should be done to ensure that one gets the lowest gold loan interest rate. The range of interest rates offered by the financial institutions varies between 7.30% to a maximum of 29%. While this is a tentative and brief overview of rates offered, certain factors influence them.
Factors affecting the loan against gold interest rate
Illustrated below are some factors that directly affect the gold loan interest rate in India:
Monthly income of an applicant
Getting a gold loan approval is quite straightforward. This is due to its secured nature, because of which lenders do not lay out stringent eligibility criteria. Having mentioned that, the financial institutions do look into an applicant’s monthly income before deciding the interest rate.
The monthly income of applicants defines their repayment capacity. The greater is this monthly income, the higher will be their repayment capacity. This is considering that they don’t have any existing obligations in the form of any other credit instrument.
Credit score of an individual
Like every other secured financial product, the credit score of an individual influences his/her gold loan interest rate. A high credit score indicates a borrower’s good repayment behaviour. It also implies high creditworthiness.
In unsecured loans, this score defines an applicant’s eligibility, whereas, for a loan against gold, it influences interest rates.
Therefore, applicants with decent credit scores can enjoy lower rates of interest than those with lesser credit scores.
Besides this, individuals must note that financial institutions charge a mark-up or spread or margin on the MCLR and RLLR while determining interest rates. This mark-up or spread or margin can vary based on a borrower’s credit score.
If one has a good credit score, financial institutions may lower this owing to previous repayment behavior. And this decrease will, in turn, lower the gold loan interest rate.
- Principal loan amount
The loan amount required by a potential borrower plays a vital role in determining rate of interest. This total loan amount is dependent on the value of a borrower’s pledged gold ornaments.
With gold prices touching an all-time high, applicants can acquire a higher loan amount. The greater is the amount of loan, the higher will be the rate of interest. Therefore, applicants should only acquire the loan amount that they actually need.
Benchmarking methods
Financial institutions majorly use benchmarking methods for deciding gold loan interest rates for borrowers. And there are two such benchmarking methods, namely Repo Linked Lending Rate (RLLR) and Marginal Cost of Funds based Lending Rate (MCLR).
The interest rates for loans against gold vary across lenders based on the benchmarking method they follow.
The gold loan interest rates linked to MCLR and RLLR will change depending on when the RBI changes its repo rate. For instance, if the RBI decides to cut down 40 basis points in the repo rate, it will directly affect the RLLR. The MCLR linked lending rate will get reduced by 20 basis points, and there will be a reduction of 40 basis points in the RLLR.
Potential individuals can now compare the gold loan interest rates considering the above-mentioned factors. However, individuals must always remember to check out various lenders to acquire a loan at the best gold loan interest rate.
Additional Read: 5 Things to Remember Before Opting for a Property Loan
