How Are Gold Loan Interest Rates Determined in India?

How Are Gold Loan Interest Rates Determined in India

The demand for gold loans has been on the rise in the Indian retail segment for some time. In July 2021, the gold loan outstanding reached Rs. 62,412 crore at a CAGR of 77.4%. Primarily, the quick disbursals, less paperwork and repayment flexibility contributed to this growth. 

Apart from these, the best gold loan interest rates are another major factor that needs special mention. Being a secured loan, the rates applicable here are comparatively affordable. Nonetheless, prospective borrowers should learn the factors that play a role here to make an informed decision.

Top 4 Factors That Determine Gold Loan Interest Rate in India

Here are some notable factors that play an active role in determining the interest rate on gold loans in this country –

  1. Benchmarking rates

Any lending institution that operates in India mandatorily follows the guidelines of the RBI. As per RBI norms, financiers must have a benchmark rate associated with the policy rates of the apex bank of this country.

Therefore, any change in policy rates will alter the benchmark rates accordingly. This is one of the primary factors that control applicable interest rates on gold loan schemes. Note that these benchmark rates are lender-specific, so the interest rate on this credit instrument varies from one financier to another.

  1. Total loan amount

As per the latest guideline of the Reserve Bank of India, the maximum LTV of gold loans is capped at 75%. It means applicants can avail up to 75% of the market value of their total gold items. Here is an example to clarify this matter: 

For instance, individuals have gold articles worth Rs. 1 lakh; in that case, that borrower can get a loan of up to Rs. 75,000 against it.

Since a high loan amount entails an increased lending risk, financiers levy a higher interest rate on this credit and vice versa. Therefore, it is ideal to opt for a loan amount as per requirements to avail a competitive gold loan interest rate and avoid unnecessary financial burden.

  1. Purity of gold items

The purity of the gold items that one pledges is another vital factor in determining the applicable interest rates on this credit instrument. Typically, financiers accept gold articles of 18 carats to 24 carats. A point to learn here is that, with gold items of high carat measures, one can secure a higher loan quantum and get the lowest gold loan interest rate.

The reason is, a 24-carat gold item holds a higher resale value, thus, reducing the lending risk of a financier when compared to that of an 18 carat. Also, gold loan providers use industry-grade carat measurement devices to check the weight and purity of pledged items. This results in a transparent gold appraisal, reducing any controversy or issues in the future.

  1. Repayment capacity of a borrower

Even though the application process of this credit instrument includes comparatively simple eligibility parameters, lenders consider the income of an applicant. The reason is simple; they try to ensure that a borrower is financially adept at making timely repayment.

This is a vital parameter that every gold loan applicant needs to fulfil. However, do note that this requirement changes from one lender to another. Hence, one should check with their preferred financial institution before applying to avoid rejection.

Therefore, individuals with a higher monthly income can avail themselves of a competitive interest rate than others. Also, they should keep the debt-to-income ratio under 40% to boost their chances further.

Apart from these factors, another crucial factor that affects the interest rate applicable to this financial product is inflation. The inflation alters the gold loan per gram rate, which decides the loan amount and interest charged.

Besides knowing the factors that can alter the applicable interest rate of a gold loan, individuals can easily find their total payable amount by using a gold loan calculator. This online device is easy to use and provides instant results. 

Nonetheless, irrespective of the applicable gold loan interest rate, one can easily manage their repayment burden by opting for a pre-payment or foreclosure. Leading financiers like Bajaj Finserv do not impose any additional charges on it. Additionally, there is a provision for customers to pay off their interest burden separately before the principal amount. Thus, improving the convenience of borrowers.

Gold loans are traditionally a financing method that offers an attractive interest rate. Gold loan interest rates are affordable compared to other unsecured financing methods. Therefore, knowing these factors that determine the applicable interest rate can aid one in making an informed decision.