Know the factors that influence the interest rate on your gold loans

New Delhi: When you think about getting a loan, the first thing that comes to mind is the interest rate. Currently, gold lending is considered one of the viable options for borrowers due to low interest rates, fast processing, and low or no foreclosure fees.

gold loans are secured credit facilities available where you will need to hold your physical gold in the form of jewelry or coins as collateral for your financing needs. As per RBI guidelines, any bank or non-bank lender can only fund up to 75% of the value of gold taken as collateral from borrowers. Since gold prices fluctuate daily, most banks and NBFCs will estimate the value of your gold based on the gold market rate that day when you apply for the loan.

Every time gold prices rise, it makes you eligible for a higher loan amount. But how the interest rates for gold loans are determined in India.

When using a gold loan from a lender, there are a few factors that affect the interest rate. These are your loan amount, credit score, external benchmarking, monthly income, and more. A lender considers these factors before deciding on the final interest rate.

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Amount of the loan:

The loan amount plays a vital role in determining your interest rates. As you know, the loan amount depends on the overall value of the gold you have pledged, the higher the value of the gold you have, the more you can borrow. But again, the larger the loan amount, the higher the interest rates on gold loans. Lenders decide interest rates based on the value of the gold pledged.

Monthly income:

Compared to other loans, a gold loan borrower does not have much difficulty in getting loan approval from a lender. However, lenders inquire about the monthly income before deciding on the interest rate. Your monthly income defines your repayment capacity. The higher the monthly income, the higher your repayment capacity will be. A higher monthly income helps you get a low interest loan. As the lenders will be assured of the fact that you will be able to repay the loan on time due to your high repayment capacity. A low monthly income also affects the loan amount.

Benchmarking by banks to decide interest rate

Lenders mainly follow two types of benchmarking methods to decide the interest rate for gold loans – MCLR-linked lending rate (internal) and repo-linked lending rate (external). Interest rates on gold loans tend to vary from lender to lender depending on the benchmark they track. The bank’s lending rate linked to the repo rate is called the lending rate linked to the repo rate, while the lending rate linked to the MCLR is called the lending rate linked to the MCLR.

Credit score

Credit score is one of the critical metrics that banks and NBFCs use to decide what interest rate you will pay on your gold loan. A high credit score reflects good repayment behavior and high creditworthiness of a borrower. In unsecured loans, the credit score defines the eligibility of an applicant whereas, in the case of a gold loan, the credit score affects the interest rate.