Factors that influence interest rate on your gold loans

The first thing that comes to mind when considering a loan is the interest rate. Due to cheap interest rates, quick processing, and minimal or no foreclosure charges, gold loans are now regarded one of the viable options for loan borrowers.

Gold loans are secured credit options that require you to keep your physical gold in the form of jewellery or coins as collateral against your funding needs. According to RBI norms, a bank or non-banking lender can only finance up to 75% of the value of gold held as collateral by borrowers. Because gold prices fluctuate on a daily basis, most banks and NBFCs will value your gold based on the market rate on the day you request for the loan.

When gold prices rise, you become eligible for a larger loan. However, how does the gold loan work? In India, interest rates are set.

There are a few elements that determine interest rate when taking out a gold loan from a lender. These include the amount of your loan, your credit score, external benchmarking, monthly income, and so on. Before settling on an interest rate, a lender examines these criteria.

The loan amount is:

The size of your loan has a significant impact on your interest rates. As you are aware, the loan amount is determined by the overall gold value guaranteed by you; the more gold you have, the more you can borrow. However, the bigger the loan amount, the higher the gold loan interest rates. Lenders set interest rates based on the value of the gold pledged.

Gross monthly income:

In comparison to other loans, obtaining loan approval from a lender is rather easy for a gold loan borrower. Lenders, on the other hand, inquire about monthly income before determining the interest rate. Your repayment ability is determined by your monthly income. The bigger your monthly income, the greater your repayment capacity. A bigger monthly income makes it easier to secure a low-interest loan. As a result of your high repayment capability, lenders will be confident that you will be able to repay the loan on time. A low monthly income has an impact on the loan amount as well.

Banks use benchmarking to determine the interest rate.

To determine the gold loan interest rate, lenders mostly use two types of benchmarking methods: MCLR linked lending rate (internal) and repo rate linked lending rate (external). The interest rates on gold loans vary from one lender to the next, depending on the benchmark they use. The repo-rate linked lending rate is the lending rate linked to the repo rate, whereas the MCLR linked lending rate is the lending rate tied to the MCLR.

Credit rating

Banks and NBFCs utilise your credit score as one of the key factors in determining the interest rate you'll pay on your gold loan. A excellent repayment history and high creditworthiness of a borrower are reflected in a high credit score. Credit score determines an applicant's eligibility for unsecured loans, whereas credit score affects the interest rate on a gold loan.