Factors That Influence Gold Loan Interest Rates

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When we think of investments, one of the best ways to invest is gold. It would have formed within us traditionally (since Indians have long been known to be the biggest consumers of gold), or it could simply be due to the warmth and security that this precious metal brings to us. At the same time, when it comes to taking out loans in times of need, this metal again comes to the rescue. We could never deny that gold loans are one of the easiest and friendliest ways to get a loan when there is a shortage of cash.

It is easier to pay and collect the metal. There are various factors, however, that would affect the interest rate of these gold loans, and you can find them here. But, before that, let’s look at what a gold loan actually is.

What is the meaning of a gold loan?

A gold loan, also known as a loan against gold, is a secured loan obtained from a lender in exchange for gold items such as gold jewelry. Lenders will usually give you a loan based on a percentage of the gold’s value. You can repay it in monthly installments and get your gold items back. Unlike other secured loans, such as a home or car loan, there are no restrictions on how gold loans can be used.

So whether you need to pay for a wedding, a family trip, or your child’s schooling, it’s a great option for meeting an unexpected financial need. In addition, several commercial and nationalized banks, as well as NBFCs, offer gold loans at low interest rates.

The gold loan process is very similar to other secured loans. In this case, you take your gold items to a lender with the necessary documentation. The lender verifies the gold products and confirms the documents presented. The lender approves the loan amount based on the appraisals. According to the loan agreement, you repay the principal amount together with the interest amount and in return receive the pledged gold commodities.

You will always know the price of gold – for example, if you reside in Coimbatore, Tamil Nadu, you can instantly look up the gold rate in Coimbatore for the present day. Therefore, you will always know the value of your loan. The only thing you would then have to consider is the interest rate you would pay.

Interest rates on gold loans

Since it is a secured loan, the interest rate is lower than an unsecured loan such as a personal loan. The interest rates that are charged on these gold loans vary from lender to lender and are determined by various factors such as the term of the gold loan, the amount of the loan, etc. It also depends on whether you get a gold loan from a bank or an NBFC. Banks often charge lower interest rates on gold loans than NBFCs.

Therefore, if you intend to apply for a gold loan, do not accept the first offer you receive. Compare gold loan programs from at least two to three lenders before making your final decision.

What affects the interest rate with a gold loan?

When you take out a gold loan, there are a few things that would raise or lower interest rates, and these are:

a) Your income: Unlike personal or business loans, gold loans have basic and simple requirements from borrowers. When you apply for a gold loan, the lender meticulously reviews everything from your credit report to your employment history to your business ambitions. On the other hand, a gold loan has very weak eligibility conditions. One of the things your lender will consider is your monthly income.

The lender will trust you more if you have a higher salary. This instantly lowers the interest rate charged by the lender. The lender will charge you a lower interest rate because they are confident that you will repay the debt. If your income is lower, however, the lender may charge you a higher interest rate.

b) The amount of the loan: The amount of the loan you need has a significant impact on the interest rate of your gold loan. If you want a larger loan, you will pay a higher interest rate. So, before settling on gold loan interest rates, consider the required loan amount and analyze all the accessible possibilities. You can also use the Gold Loan Interest Rate Calculator to get a rough estimate.

c) Market Lending Rates: The external benchmark to which the lender’s interest rate is tied will determine the interest rate on your gold loan. It is assumed that all loans approved by the bank are linked to an external reference. When the RBI raised policy rates, lenders also quickly raised interest rates. Even when the Reserve Bank of India cut rates, interest rates did not change immediately. The RBI has asked lenders to link their lending rates to an external benchmark.

This could be the RBI repo rate or the 10-year government bond rate. This rate will affect the interest rates for gold loans.

d) Your CIBIL score: Your CIBIL score defines your creditworthiness, and it is one of the essential elements considered by your lender when calculating the interest rate on a gold loan. A good credit rating indicates that you have an excellent repayment history and can easily repay the loan amount on time. The higher your CIBIL, the more likely you are to benefit from lower interest rates. So, before you can apply for a gold loan, make sure you have a decent CIBIL score and any issues with your credit report have been resolved.

Final Thoughts

When you take out a gold loan (from anywhere), it’s never too late to find out everything that’s going on behind the scenes. When you know the reasons, it is easier for you to make a wiser decision. The same goes for taking out a gold loan and knowing the rates; hence, you would take this loan at the right time.

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