5 Key Factors That Determine Gold Loan Interest Rates

Gold loans are secured loans where the borrower pledges their gold articles as security in order to obtain a loan. The lender in return charges an interest rate and once you return the entire loan amount, the lender returns your gold kept as a guarantee. The interest rate on gold loans varies from 7.35% to 29 % per annum. The loan amount goes from Rs. 1500 to Rs. 5 crores.

Key Highlights for Gold loans

1. Secured loans - Gold loans are secured loans that use a gold article as a security.
2. Interest rates - Gold loan interest rates vary from 7.35% to 29% per annum.
3. Loan amount - The gold loan amount varies from Rs.1500 to Rs.5 crores.
4. Repayment period - The repayment period varies from 7 days to 240 months.
5. Minimal documentation - In most cases, no credit score or income statement is required. Gold loan is sanctioned based on the value of the gold pledged as security.
6. LTV ratio - The loan-to-value ratio for gold loans is capped by RBI at 75%. This means that you can get a loan worth 75% of the value of the gold pledged.
7. Usability - Gold loans can be used for a variety of purposes without any restrictions.
8. Processing time – Gold loans can be processed very fast as there is minimal documentation required.

So, what are the factors that determine the interest rates on a gold loan? Let’s take a look.

Factors Affecting Gold Loan Interest Rates

Before approving the gold loan, lenders look at certain factors to determine the interest rate. They want to make sure the decision to lend their capital is a safe one.

Following are some of the key factors that determine the gold loan rate –

1. Income Level – One of the most important factors that a lender will consider while approving a gold loan. Lenders are more confident about your repayment capacity when your income level is high and hence would want to offer a lower interest rate. Lower-level income, however, will attract higher interest rates. We can say that income level and interest rates are inversely proportional. 
2. Market Price of Gold – The current market prices of gold also determine the interest rates the lender wants to offer. Typically, the loan amount would be around 60-70% of the value of the gold article kept as security. If the gold rates are high, the value of the article also goes up and hence the lender’s risk goes down. The lender will feel more comfortable in extending a low rate of interest. However, in case the gold prices are down, the lender’s risk increases, and the interest rates would go up.
3. Principal Loan Amount – The rate of interest also depends on the amount being taken as a loan or the principal amount. The higher the principal amount is, the lower your interest rate would be. This is because the lender has a higher-value loan article pledged as security and hence they are comfortable offering a lower rate of interest.
4. External Benchmark Lending Rates – When the Reserve Bank of India (RBI) changes its policies/rates, the gold loan interest rates also change. The gold loan interest rates are believed to be linked to an external lending rate which could be the repo rate or the 10-year government bond rate. They have an impact on the gold loan interest rate also and are directly proportional.
5. Credit Score – Credit score is one of the most important factors looked at by lenders while approving any loan. The higher your score is, the higher the chances of your getting an attractive interest rate. The lower your credit score is, the higher the interest rate will be. It is best to always research all the options available to you and then proceed with applying for the loan.

Key Gold Loan Providers in India

Eligibility Criteria for a Gold loan

1. Age – 21 to 70 years
2. Employment Status – Salaried, Self-employed, Business people, Farmers, etc.

Documentation Needed to Apply for a Gold Loan 

1. Identity proof – Aadhaar card, Passport, Driving License, Voter ID card
2. Address proof – Aadhaar card, Passport, Driving License, Voter ID card, Letter issued by National Population Register

Do’s and Don’ts While Applying for a Gold Loan

What should you do?

1. Check the purity of your gold – Lenders usually take gold that is 18 carats and above in purity. Check the purity of your gold beforehand to avoid disappointment and fraud later.
2. Choose a trusted lender – Since a gold loan is a secured loan, the lender you go to must be a trustworthy person. You want your gold back after repaying the entire loan and the lender should not commit any fraud else you will lose your gold and hence a lot of money.
3. Check all lender options available – All lenders would offer a different interest rate based on their understanding of the applicant’s profile and the gold article value. Check which one suits you the best. 

What should you not do?

1. Take a gold loan only when needed – Gold loans are easy to get as you only need a gold article as collateral. However, do assess if you really need the loan as you will have to pay interest on the amount borrowed.
2. Do not take a loan for addictive habits – Some people pledge their gold articles to borrow money for betting etc. They end up losing a lot of money unnecessarily. You not only lose your gold but also will have to repay the debt borrowed as a gold loan.
3. Assess the amount of loan you will get – The limit set by RBI for the loan-to-value ratio is 75% of the gold article pledged. Before you opt for a gold loan, you must calculate if this is going to be a sufficient amount for you.

Conclusion

Gold loans are an easy and fast way to get a loan if you have a gold article to be pledged. It is very important to check the offers from trustworthy lenders and chose accordingly. You could use the gold loan for a variety of reasons. Pay your dues on time to avoid overdue charges. Remember you will lose your gold if you are unable to pay back your dues so evaluate accordingly.

FAQ of 5 Key Factors That Determine Gold Loan Interest Rates

1. What is the maximum gold loan that I can get?

As per RBI policy, the loan-to-value ratio for a gold loan is 75%. So, the maximum gold loan that you can get is 75% of the value of the gold article pledged.

2. What if I am unable to pay the gold loan?

In the case the gold loan is not paid, the loan will be classified as bad debt. The lender will auction the gold article kept as security for recovery of bad debt.

3. What is not acceptable as collateral in the case of gold loans?

Banks do not accept gold bars or gold bullion as collateral for gold loans.

4. What should be the gold purity for a gold loan?

The gold purity should be at least 18 carats and above to avail of a gold loan.

5. Can I get cash as a gold loan?

Yes, you can get cash. You could also choose to take the loan partly in cash and the rest in the bank account.