Factors that influence interest rates on gold loans

Gold is considered to be one of the most valuable assets of any Indian. Those with a considerable amount of gold articles can pledge them and get a sizable loan from a lender to fund any expense without end-to-end usage restriction. A number of financial organisations, including NBFCs, offer gold loans with low-interest rates and multiple payback terms.

However, in order to make an informed choice, people who require urgent funding should take into account the factors that affect the interest rate on gold loans. In this article, we are going to see factors that affect gold loan interest rates. 

8 top factors affecting gold loan interest rates

Lenders determine gold loan per gram rate by taking into account a number of factors. These are as follows:

Principal amount of loan

Since gold is a high-priced asset, borrowers can easily get a lumpsum amount. The typical loan amount provided by lenders is 75% of the entire worth of gold that an individual pledges. In general, as loan amount rises, so does the interest rate. This is because higher loan sanctions are riskier for lenders than small-ticket loans.

Lenders’ benchmarking strategies

Gold loan interest rates are illustrative. Financial institutions use two sorts of benchmarking techniques to determine interest rates:

Lending based on the MCLR

EMIs will alter every six or twelve months if a lending institution’s gold loan rates are determined by the MCLR (Marginal Cost of Funds based Lending Rate).

Lending based on the RLLR

EMIs will alter every three months or every quarter if the Repo Linked Lending Rate (RLLR) is linked to the gold loan rates of a lending institution.

Eligibility of the borrower

When determining the interest rate, lenders also take into account the applicant’s monthly income and credit score.

Monthly incomeĀ 

Applicants need to prove their ability to repay the loan. The borrower’s ability to repay the loan will be better if their monthly income is large and consistent and they don’t already have any significant financial obligations.

Additionally, lenders provide lower gold loan rates since bigger monthly salaries reassure them that borrowers would return the loan amount without defaulting. Contrarily, applicants with low income profiles suggest high chances of defaulting, thus, their interest rates will be high to offset the risk to the lender.

Credit score

The credit score is a significant consideration for lenders when determining the interest rates on gold loans, even though it is not the main factor in determining whether or not a loan will be approved. A strong credit rating, especially one of 750 or higher, indicates dependable repayment behaviour and a high level of trustworthiness in a borrower. Because of this, lenders provide such candidates with lower interest rates.

In contrast, a credit score below 700 results in a higher interest rate. In order to get a loan with cheap interest rates, people must try to raise their CIBIL scores in order to get the best deals.

External factors

The market’s supply and demand imbalances, inflation, and other external factors are significant determinants of gold loan interest rates. In addition, the interest rates on gold loans are also based on the current gold market prices. Therefore, potential applicants should do thorough research on these external factors so that they can reap the maximum benefits from their gold loan.

To sum it up, these are some of the most crucial factors that affect gold loan rates in India. The interest rates on gold loans determine the monthly EMIs for a borrower. In other words, an individualā€™s repayment amount will be lesser if the interest rates are low. Therefore, it is essential to examine various lenders to determine the interest rates they give on gold loans and choose the best offer.

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