A gold loan is the best option a person can choose to meet his/her financial requirements. Banks and non-banking financial companies require their borrowers to pledge their gold ornaments as security to acquire a gold loan. The demand for gold loans has seen a tremendous increase with the rising gold jewellery prices.
When the prices are high, you will likely receive a higher loan amount against your gold jewellery at attractive gold loan rates. The gold loan interest rates directly affect your repayment amount. Therefore, it is essential to understand how the interest rates are determined and what you can do to secure a lower gold loan rate.
Factors Affecting The Gold Loan Interest Rates
When you apply for a gold loan, the lender considers factors like the loan amount you need, your credit score, monthly income, external benchmarking, etc. Before approving your loan application and offering you a gold loan per gram rate, you are eligible to get it.
1. Principal Loan Amount
The loan amount you need plays a crucial role in determining your gold loan interest rates. The total loan amount depends on the value of the gold ornaments that you have pledged. Lenders usually approve from 60% to 90% of the overall declared value as a loan.
Opting for a higher loan amount means that you will receive a higher interest rate. Always keep in mind to check the required loan amount, and compare all available options before choosing the gold loan interest rates.
2. Monthly Income
The best part about a gold loan is that the eligibility norms are relaxed compared to unsecured loans such as a personal loan. You can quickly get a gold loan approval. However, lenders prefer to look into your source of income before deciding on a gold loan interest rate for you. Lenders like Muthoot FinCorp establish that you can repay your EMIs on time. A higher and stable income would mean that your repayment capacity is higher, provided that you do not have any current financial obligations.
As your lender is assured that you will repay the loan amount with interest without any delay or default, you will receive a lower interest rate on your gold loan application. A low income would adversely affect both the loan amount and the interest rates as it indicates limited repayment capacity.
3. Benchmarking Methods
Banks mostly use benchmarking methods to decide interest rates for borrowers. There are two types of benchmarking – MCLR linked lending rate and Repo Rate rending rate. The gold loan rates vary from lender to lender, depending on which benchmarking method they follow.
For example, if the Reserve Bank of India decides to cut 40 basis points in the Repo Rate, it will directly impact the Repo Rate Lending Rate (RLLR). The RLLR will have to be reduced by 40 basis points. Furthermore, there will be a reduction of 20 basis points in the MCLR linked lending rate.
Benchmarking methods influence the gold loan interest rates. If your lender’s gold loan interest rates are linked to RLLR, you will see a change in your EMIs every three months. If they are linked to MCLR, the gold loan rates will change every six months or one year. As and when the Reserve Bank of India changes its repo rate, the gold loan rates linked to RLLR and MCLR will also change.
So, always check the benchmarking method that your lender has been following to make an informed decision while choosing a gold loan rate for yourself.
4. CIBIL Score
A CIBIL score indicates your creditworthiness, and it is one of the crucial factors considered by your lender before deciding on a gold loan interest rate. If you have maintained a healthy credit score, it indicates that you have good repayment behaviour, and you can repay the loan amount without defaulting on payments.
The higher the credit score, the better are your chances to get lower interest rates. You will need to ensure you have a good CIBIL score before applying for a gold loan, and if there are discrepancies in your credit report, it would be wise to rectify them in advance.
A gold loan interest rate affects your monthly EMIs. The lower your interest rate, the lower your monthly EMIs. You will need to choose your interest rate wisely before applying for a gold loan.
To determine an affordable interest rate, You can use your lender’s online gold loan interest rate calculator to ascertain a gold loan rate based on your preference.
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