Indians have an emotional affinity to gold, which is often a family heirloom; they are often reluctant to sell off this jewelry in a financial emergency. In this case, they can instead opt for a loan against gold to address their liquidity crisis and maintain its ownership. Other reasons to go ahead with this financial product are the easy availability, affordable gold loan interest rate, and zero end-use restrictions.
- A recent report predicts that India’s formal gold loan market may grow more than 250% to $105bn by FY24. The features of this credit instrument play a part in this surge.
However, interest rates on this financial product keep changing. Thus, individuals need to know the factors that impact it. It will help them choose an ideal time to make an application for this credit instrument.
Factors impact gold loan interest rate
Following are some factors that play a part in deciding the gold loan interest rate –
- Loan amount
The gold loan amount depends on the quantity and quality of the gold pledged. Since it is a secured credit, lenders sanction a certain percentage of the current market value of mortgaged gold, also known as LTV. The Reserve Bank of India revised the highest gold loan LTV to 90% from 75%.
For instance, if you submit total gold ornaments of Rs.1 lakh, you can get up to Rs.90,000 as a loan against it.
However, with a higher loan amount, the lending risk also increases. Since repaying a large sum often becomes difficult, borrowers tend to miss EMI or fail to clear debts on time. Thus, financiers levy higher interest rates on a high-value gold loan to cover the risk of lending.
- Monthly income
Although the CIBIL score of applicants does not play a major role in gold loan approval, lenders certainly check the monthly income to ensure a timely repayment. Usually, lenders prefer borrowers with a steady monthly income and good repayment history.
Moreover, individuals can also mention additional income sources as well to qualify for the best gold loan interest rate. Nonetheless, selected lenders offer gold loans with multiple repayment options. Thus, borrowers can choose one that suits their repayment capacity.
- Gold purity
One of the prominent determining factors of gold loan interest rate is the purity of the gold submitted. Typically, lenders in India accept gold articles from 18 carats to 24 carats. However, gold items with a higher carat rate fetch a better interest rate. For instance, lenders will offer a lower interest rate for 22-carat gold articles than 18-carat ones.
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Lenders also use an industry-grade carat device during the gold appraisal. It ensures the accuracy and authenticity of the gold pledged and helps secure competitive interest rates.
Besides these, several macroeconomic factors also play a major role in determining the gold loan interest rate. They are mentioned below:
During inflation, the currency value depreciates, and therefore individuals tend to invest in gold as it acts as a hedge against inflation. Resultantly, the price of gold remains high at that time, and individuals can enjoy a lower rate of interest.
- Market price of gold
Even the slightest change in the money market influences the gold price. Resultantly, it impacts the gold loan interest rate. For instance, when the gold price rises, the lending risk is low, and therefore, lenders can offer better rates on the gold and vice versa.
Besides, lenders also offer attractive gold loan interest rates to their existing customers. However, borrowers should also compare different lenders to get the best rate. They can also compute the interest outgo by using a gold loan calculator.
How to use a gold loan calculator?
Almost all leading financial institutions offer this online tool for individuals to use for free. Following is the common ways to use this calculator to derive the total interest payable for a gold loan.
- Go to the official website of your preferred lender and open the gold loan calculator
- Input the required loan amount and tenor
- Enter applicable gold loan interest rate
Individuals can instantly see the monthly interest and total interest payable. Alongside, this calculator also tells the gold weight required to avail the desired fund.
Alternatively, individuals can also enter the gold weight of all ornaments and purity alongside tenor and interest rate. It will show the monthly interest, total interest payable, and loan amount they are eligible for, depending on the day’s gold market price.
For instance, an individual wants funds of Rs.3 lakh for a tenor of 6 months. The interest rate applicable is 14.28% p.a. That individual needs to pledge around 92.8 grams of gold. The monthly interest is Rs.3,570, and the total interest payable is Rs.21,420.
However, the values are tentative, and it changes with the choice of lender, gold’s current per gram rate, and purity of gold items. Hence, before applying, individuals should have a detailed understanding of the factors that affect the gold loan interest rate in India. It will help individuals to repay the loan faster and plan their financials conveniently.