Banks offer several types of loans and one such borrowing method is gold loans. Lenders accept gold as collateral and help you secure a timely and useful loan. However, you have to understand the nitty-gritty of gold loan interest rates first.
Gold being a timeless and precious asset has an exorbitant price. It does not mean that banks would offer a better interest rate for gold collateral. It is common practice to surf around and pick the lender or bank that offers a better interest rate. But, how does a lender determine the gold loan interest rate for you? Do you know that the interest rate for you and the next customer walking in to pledge his gold for money would be different? Here is how your interest rate for a gold loan is calculated.
The total amount and gold loan interest rates
The money lenders and banks rely on different factors to fix the rates. You have to qualify or be eligible to secure the amount. Look into the specific lender’s rules of eligibility before you proceed. For example, some banks do not lend to those who are below 18 or above 75 years old.
Apart from the gold ornaments’ purity (24 caret, 22 caret, or 18 caret), the lender calculate interest based on loan principal amount. So, it is imperative to know the value of the pledged golden items. The lender calculates the loan’s interest rate based on the exact value of the gold and the loan requested.
Banks and financiers do not bother about sentiments or emotions. They make cold, hard calculations before sanctioning a loan. And the total amount requested by you makes a huge difference. The rates for huge borrowings are higher than for smaller loan amounts. An annual interest rate in the range of 7% to 8% with a margin of 0.1% to 0.5% is common. If the loan requested is almost equal to or equal to the gold value, the interest rate will be higher, or your loan could get disqualified.
Lending rates and marginal costs
Commercial banks had a base system to determine the loan interest. But it got replaced with MCLR or marginal costs of funds based lending rates. It is a benchmark that helps you make a good decision. The gold loan interest rates cannot go beneath such a minimum, fixed limit.
Yes, the lenders cannot offer money below the lowest interest rate. This benchmark is internally decided by the banking or finance company. You can calculate the MCLR value based on the loan tenor. It is the amount of time you have to repay the loan and has a significant impact on costs.
The banks carefully inspect the markets and determine the MCLR for gold. It includes a tenor premium that accounts for lending risk. The lenders will have a high risk if the loan duration is very long. So, they charge the premium and offer diverse loan categories with fixed or variable rates. Thus, if you opt for shorter duration loans, the interest rate could be a little lower.
Impact of income on gold loan interest rates
The borrower pledges gold, and the lender offers money in the security that if the borrower defaults the lender takes ownership of the gold. However, your income or salary is also a major factor. It determines your ability to pay off the interest and the loan amount.
The lenders verify your monthly income or wages to confirm the loan interest rate. Those with a higher monthly salary have a higher repayment capacity. The reassured lender also offers a low-cost gold loan that is friendly and convenient. But do not get carried away, as the banks also check your credentials. Those who have existing financial obligations like EMI or credit card debts fall out of favor. Even though you are paying EMI out of another bank’s account, it would come under the spotlight.
Linking repo rates with lending
MCLR is not the only benchmark used by banks and lenders. The gold loan interest rates also have an external factor of influence. It is called the RLLR or the repo rate linked lending rate. Apart from the banking regulator’s repo rate, it also includes the bank’s margin or spread.
MCLR value can change abruptly. But the MCLR can get reduced only by 20 basis points based on past trends. So, know these benchmarking techniques before you apply for a gold loan.
Each lender would link its interest rates of gold loans to either RLLR or MCLR. If linked to RLLR, the rates update once in 3 months, minimum. But for MCLR gold loans, the interest rates reset after six months or one year. So, borrowers too have to be alert and keep track of these repo rate changes.
The volatility of RLLR rates is significant as compared to MCLR loans. But the easy monthly installments, EMI, and others make it more favorable. So, be knowledgeable about these benchmarks.
Role of credit score on gold loan interest rates
The credit score is similar to your income proof. It showcases the ability to repay based on your past trends. Remember that a higher-income individual need not necessarily have a higher credit score. It depends on your previous loan payments, credit card payments, and others. Credit scores of 700 or above will secure you a low-interest loan with ease. However, the requirements of the lenders vary from time to time and between banks.
Finally, it is best not to run to a lender who offers the least interest rate and very convenient options. The credibility of the lender is a very significant factor. 0.2% interest difference would not have a great deal of change. However, pledging your gold to an unreliable bank could be disastrous. Remember that your gold will be in the custody of the lender throughout the loan process. Thus, it would be best to choose someone reliable, very transparent in the process, and who follows all legal constraints.