A gold loan is one of the popular options to meet an immediate financial requirement without dipping into your savings. Both banks and non-banking financial institutions offer gold loans against your gold items. Unlike an unsecured loan, you will need to pledge your gold ornaments as security to get a gold loan.
Given the increasing prices of gold in the market, you will likely get a higher loan amount against your gold items. Lenders offer up to 75% of the gold’s market value as a loan. The best part is that the gold loan rates are low. However, whether or not you can get the best gold loan interest rate depends on factors, such as the loan amount, credit score, income, etc.
Here are the crucial things to know the gold loan interest rates
- Monthly income
Regardless of where you work and the kind of employment you hold, your monthly income is a crucial factor affecting your gold loan interest rate. Before deciding on a gold rate based on your profile, your lender checks your monthly income to determine your repayment capacity. The higher your monthly income, the greater your chances of securing a lower interest rate.
The most credible borrowers in the eyes of a lender are the ones with high-earning. With higher repayment capacity, you can easily secure lower gold rates compared to borrowers with low monthly incomes. Also, having a higher income ensures better gold rates even if you have a low credit score.
- Credit score
Another factor affecting your gold loan interest rate is your credit score. It is a three-digit number that generally ranges between 300 and 900. Your credit score is determined by the Credit Bureau India based on the following factors:
- Credit history
- Length of credit history
- Credit utilization
- Credit mix
- New credit
Before approving your gold loan application at a lower interest rate, your lender will check your credit score to check whether or not you have used your past loans responsibility. To put it simply, It shows whether you are a creditworthy person. Most lenders require a minimum CIBIL score of 750 to approve an application. But, if your credit score is greater than the said range, you negotiate with your lender to get the lowest interest rate available.
- Benchmarking methods
Banks use benchmarking methods to decide gold loan interest rates. Generally, there are types of benchmarking methods – MCRL linked lending rate and Repo Rate lending rate. The gold loan rate depends on the type of benchmarking your lender follows. It is worth noting the interest rates are subject to change due to changes in the RRLR and MCLR. For instance, if the RBI decides to cut 50 basis points in the repo rate, the RRLR will reduce by 40 basis points. Also, the MCLR will fall by 20 basis points.
Therefore, the benchmarking methods greatly influence the gold loan rates. If your lender follows the RRLR method, your EMIs will see a change after every three months. If they follow the MCLR method, your gold loan rate will change every six months or one year. So, before applying for a gold loan, it is imperative to check the benchmarking your lender follows to make an informed decision.
- Loan amount
Although you can secure up to 75% of your gold’s value as a loan, it does not mean that you should go ahead and apply for a higher loan amount. Depending on the value of your gold items, your loan amount can be as high as Rs. 30,00,000/-. However, you must apply for the loan amount you need, as opting for a higher loan amount fetches higher gold loan interest rates. So, before applying for a loan amount, you must assess your financial situation to make an informed decision.
- Gold loan tenure
Another factor influencing the gold loan rate is the repayment tenure. Your lender may offer you a loan tenure that ranges between 6 to 36 months. But, it is worth noting that getting a longer loan tenure generally means having a higher interest in the long run. So, while applying for a gold loan, you must choose a loan tenure within which you can comfortably make repayments.
If you have the budget, it is better to opt for a shorter repayment tenure. Your EMI may increase, but you will pay less interest. Besides, you can get rid of the financial burden faster.
The gold loan interest rates significantly affect your EMIs. As a rule of thumb, the lower your interest rate, the lower will be your monthly payments. It is advisable to use your lender’s online gold loan EMI calculator to determine an interest rate based on your affordability.