Gold is considered an asset in our country as well as internationally. Indians have an emotional attachment to the precious metal and preserve it for financial emergencies and their children’s weddings. It helps them secure loans and fulfils their cash requirements in such circumstances. The loan amount’s repayment is subject to interest rates that depend on different factors. In this blog, we will discuss some of the factors affecting the gold loan interest rate.
Factors Affecting Gold Loan Interest Rate
When you apply for a gold loan, you agree to keep your gold as collateral for borrowing money equivalent to its value. While such loans are easy to secure, different factors affect their interest rate, including:
1. Loan amount: The interest rate on gold loans depends on the quantity and level of purity of the gold you offer as collateral. As this loan is secure, the lender penalises a percentage of the current market value of the mortgage gold. This value, also called the LTV, has been set as 90% for gold loans by the Reserve Bank of India. For instance, if you pledge gold worth Rs. 1 lakh according to the current market value, you will be able to secure a loan of upto Rs. 90,000 against it.
2. Monthly income: One of the main components of the eligibility criteria is basic credit verification. Before approving a loan, lenders thoroughly enquire about your monthly income, repayment history, and ongoing loans. If your repayment history is good, you will be better position to negotiate a favourable interest rate on your gold rate.
3. Gold purity: The purity of the pledged gold is another important factor influencing the gold loan interest rate. Lenders usually accept gold of 18-24 carat purity. The higher the purity of the pledged gold, the lower will be the interest rate, which means that the gold loan interest rate on 22k gold will be lower than that on 18 k gold.
4. Inflation: People tend to invest in gold as the currency value depreciates during inflation. This is because gold investment acts as a hedge against inflation. As the gold prices are high, the interest rate on gold loans will be low in these circumstances.
5. Today Gold Rate India: Gold prices keep fluctuating, affecting the interest rates on gold loans. When the gold price is on the rise, lenders tend to offer better interest rates as the credit risk is lower.
6. Benchmarking methods: Lenders usually employ benchmarking methods to determine suitable interest rates. Two types of benchmarking methods— Repo Rate rending rate and MCLR link lending rate are used by banks. The gold loan interest rates depend on the benchmarking method followed by the lender. Suppose RBI decides to cut 40 basis points in Repo Rate. In that case, it will directly affect the Repo Rate Lending Rate as it will have to be reduce by 40 basis points. On the other hand, 20 basis points will be reduce in MCLR linked lending rate.
Furthermore, if your lender uses the Repo Rate rending rate method, your EMI will change every three months. However, if the MCLR-linked lending rate is use, the rates will change every 6-12 months. Whenever RBI decides to change its repo rate, RLLR and MCLR-linked gold rates will also undergo a change. Therefore, it is best to determine the benchmarking method your lender is using. It will help you make an informed decision while choosing a gold loan interest rate.
The interest rate of your gold loan will significantly affect your monthly instalments. Lower the gold loan interest rate, and lower the amount of your monthly EMI. Therefore, you should be very careful about the Today Gold Rate India and the interest rate while applying for a gold loan.