Factors that can influence interest rates on gold loans
Gold loan is a type of secured financing option that allows you to borrow against gold ornaments and coins. Under Reserve Bank of India (RBI) guidelines, a lender can give you a maximum of 75% of the value of your gold. Since gold prices fluctuate daily, most lenders will estimate the value of your gold based on the market rate for gold on the day you apply for the loan.
Interest rates on gold loans typically start at 7% and go up to 18%. The loan amount and the borrower’s income are the two main factors that determine the interest rate.
The higher the loan amount, the higher the interest rate you will have to pay. A regular and high income can help you get a lower interest rate. The loan value is directly related to the weight of your gold ornament.
“If the gold ornaments are studded with precious stones, the weight of these added coins will be excluded during the appraisal process to determine the value of the pledged gold,” said Raj Khosla, founder and managing director of MyMoneyMantra.com. .
The purity of gold does not influence the interest rate to a large extent. “There is no direct correlation between the purity of gold and the interest rate. In some cases, for example when the gold pledged has a purity of 18,000, the applicable interest rate may be slightly impacted,” Khosla said.
“Credit scores don’t affect interest rates. First, gold loans do not require the borrower to have a credit score. Since the lender holds at least 25% more than the loan value as collateral for the loan, they are ready to lend even without a credit score,” said Adil Shetty, CEO of Bankbazaar.com.
Some NBFCs and banks charge a foreclosure fee of up to 2% (excluding GST) if you repay the loan before a pre-determined repayment window, which is usually 3-6 months, and a processing fee of at least ₹500 or 0.5%-2% of loan amount.
“Banks and NBFCs charge foreclosure fees, while almost all new-era digital lenders only charge an interest rate,” Khosla said.
Personal loan or gold?
Since gold loans are given against collateral, the interest rates are comparatively cheaper than personal loans. They also offer better repayment flexibility.
“Gold loans allow several repayment options, which include regular EMIs, bullet method of repayment, installment payment of interest while principal is paid at the end of term and initial interest payment is made at beginning of the loan and the principal at the end. Personal loans do not offer such flexible options. Also, the typical duration of gold loans is shorter at 1-2 years,” Shetty said.