How Gold Loan Interest Rates are Determined in India?

A gold loan is one of the viable options that an individual can choose to meet his or her financial requirements. There are several banks and Non-banking Financial Companies (NBFCs) that provide it to customers. Currently, Gold Prices are touching new heights every day in the domestic market. And these rising prices of gold have boosted the demand for a Gold Loan. You must be thinking why? Well, high gold prices mean you could get a higher loan amount against your gold ornaments at affordable interest rates. But how Gold Loan Interest Rates are determined in India?

Interest Rates

This is the question so many individuals ask before opting for a loan as the interest rate is that one thing that directly affects your repayment amount. A Gold Loan offers more than one repayment option like Bullet Repayment, Interest Payout at Regular Intervals, etc, that makes it easier for the borrowers to opt for it. However, the role of choosing the best interest rates remains the same. To choose the suitable Gold Loan interest rates for you, you need to know the process via Gold Loan interest rates are determined in India.

Factors that Decide Gold Loan Interest Rates in India

When going for a gold loan from any of the lenders, there are a few factors that affect your Gold Loan Interest Rates. These are your loan amount, credit score, external benchmarking, monthly income, etc. A lender will consider these factors before deciding the final rate of interest. We are giving details about all of these factors below. Please have a look!

Loan Amount

Loan amount plays a pretty crucial role in determining your Gold Loan interest rates whether you are taking a gold loan from a bank or a financial institution. As you know the loan amount depends on the overall gold value pledged by you. Since the gold prices are at an all-time high, you could get a higher loan amount. Usually, the gold loan amount ranges from 65% to 90% of the overall gold value.

Higher the loan amount, higher would be the Gold Loan Interest rates. Several lenders decide interest rates according to the value of pledged gold. For example, the Indian Overseas Bank Gold Loan Interest Rates tend to change according to the loan amount. The interest rate for the loan amount above INR 3 lakh is higher than a loan amount below INR 3 lakh and ranges from 10.20% – 10.70% per annum.

So, when choosing the Gold Loan Interest Rates, it is important to check the required loan amount and compare all the options before deciding the suitable one for you.

Monthly Income

A Gold Loan is a secured loan and several people prefer it due to the lenient eligibility criteria as compared to unsecured loans such as a personal loan. So, you won’t face much difficulty in getting the loan approval from a lender. However, lenders like to check the monthly income before deciding the rate of interest. Your monthly income defines your repayment capacity. Higher the monthly income, higher would be your repayment capacity provided you don’t have any existing obligations in the form of credit card or loan EMIs.

A higher monthly income can get you low gold loan interest rates. As lenders will be assured of the fact that you will be able to repay the loan on time backed by your high repayment capacity. A low monthly income can affect your loan amount too as it is unlikely that lenders will provide you a higher loan amount because of the limited repayment capacity you have.

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Benchmarking Methods Used by Banks to decide the Interest Rate

Banks follow mainly two types of Benchmarking methods to decide the Gold Loan Interest Rate – MCLR linked Lending Rate (Internal) and Repo Rate Linked Lending Rate (External). Gold Loan interest rates tend to change from one lender to another according to which benchmark they follow. Bank’s lending rate connected to the Repo rate is known as the Repo-rate Linked Lending Rate while the lending rate linked to the MCLR is known as the MCLR linked lending rate. For example, if the RBI decides to cut 40 basis points in the Repo Rate, there will be the same reduction of 40 basis points in the RLLR. On the other hand, there could be a reduction of only 20 basis points in the MCLR linked lending rate if the past trends are to be taken into consideration.

Gold Loan interest rates change from one lender to another according to these benchmarking methods. If the Gold Loan interest rates are linked to RLLR, it will be updated minimum once in three months and it will be reflected in your EMI amount as compared to the rates linked with MCLR as the reset period is fixed at 6 months or 1 year. Whenever RBI changes its repo rate, gold loan interest rates will also change if the particular lender is following the external benchmarking method. You can keep track of the gold loan interest rates in this case.

So, when choosing the Gold Loan interest rates, you should check the benchmarking methods that a lender has been following so that you can make a suitable decision for yourself.

Credit Score

Credit Score is one of the important factors that affect your interest rates. A high credit score indicates a good repayment behavior and high creditworthiness of an individual. In unsecured loans, credit score defines the eligibility of an applicant whereas, in the case of a gold loan, credit score affects the interest rates.

So, people with good credit scores (considered to be 700 or above) can get lower interest rates as compared to borrowers with low credit scores. Other than this, you also need to remember that lenders charge a spread/mark-up/margin on the RLLR and MCLR while deciding the gold loan interest rates. This spread/mark-up/margin can vary according to the credit score of borrowers. If you have a good credit score, lenders may decrease this because of past repayment behavior. And this reduction will make your Gold Loan interest rates lower.

So, you can see how your credit score determines the Gold Loan interest rates for you. Higher Credit score automatically indicates that you can get lower interest rates and vice versa.

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How Do Gold Loan Interest Rates Affect your Repayment Amount?

In any case of a loan, interest rates directly affect your repayment amount. In the case of a gold loan too, if you opt for lower interest rates, the repayment amount will be lower as compared to high gold loan interest rates. Though unlike other loans, Gold Loan provides you three other repayment options other than the EMI. These methods are Bullet Repayment, Interest payout at regular intervals. But it doesn’t matter which repayment option you choose, Gold Loan interest rates will affect the interest amount.

So, how does the Gold Loan interest rate affect your repayment amount? To understand this better, let’s consider an example. Suppose an applicant wants to opt for a Gold Loan of INR 2 lakh for 24 months. Here, we are taking two different interest rates; 10% and 15% per annum so that we can understand the impact of interest rates on the repayment amount.

On taking the interest rate of 10% per annum, the monthly installment would be INR 9,229 and the interest outgo will be INR 21,496

On the other hand, when we take the interest rate of 16% per annum, the monthly installment would be INR 9,793 and the interest outgo will be INR 35,023.

So, from the above example, you can see that on choosing a higher gold loan interest rate, the applicant would need to pay around INR 500 per month extra as compared to a lower interest rate of 10% per annum. Similarly, the applicant would need to pay INR 14,000 more as the interest outgo during the tenure. That’s why you should choose lower interest rates on your gold loan facility.

All these calculations can be done with the help of the Gold Loan EMI Calculator. You only need to feed a few basic details such as required loan amount, rate of interest and tenure. The tool will instantly provide you the EMI amount and interest outgo. This is a pretty efficient tool to estimate your finances and compare the options when you are choosing the Gold Loan Interest Rates.