Four factors affecting gold loan interest rates

The fact that gold can be pledged to pay for unexpected cash needs, such as medical bills, vacations, children’s education, business expansion, and even putting a down payment on a car, is not often known. A number of financial institutions in India, including NBFCs, offer gold loans with low interest rates and flexible payback terms.

To make an informed decision, people who require urgent funding should check on these pointers to ensure a low rate of interest on gold loan. Read on to know more about the same. 

What are the main factors affecting interest rates on gold loans?

Lenders examine the interest rate while sanctioning a gold loan application by taking into account a number of factors. These factors are as follows:

  • Principal gold loan amount 

Because of the worth of gold as an asset, borrowers can easily get a larger loan depending on the weight and purity of their gold. In general, loan amount provided by lenders is 75% of the entire gold value that an applicant pledges. Further, as the loan amount rises, so does the interest rate. This is because larger loan amounts are riskier for lenders than smaller-ticket loans.

  • Lenders’ benchmarking strategies

Financial institutions usually use two sorts of benchmarking techniques to determine interest rates.

  1. Lending based on the MCLR

EMIs will alter every six or twelve months if the MCLR (Marginal Cost of Funds based Lending Rate) determine a lending institution’s gold loan rates.

  1. Lending based on the MCLR

The EMIs will alter every three months or every quarter if the Repo Linked Lending Rate (RLLR) is linked to the gold loan interest rates of a financial institution.

However, the interest rates on gold loans that are correlated with MCLR and RLLR fluctuate in response to changes in the repo rate made by the Reserve Bank of India.

  • Eligibility of the borrower

When determining the interest rate, lenders also take into account the applicant’s monthly income and credit score.

  1. Monthly income 

Candidates have to prove their capability to repay the loan. If the borrower has a sizable and reliable monthly income and no major financial commitments, his/her capacity to repay the loan will be stronger.

Additionally, lenders provide a low rate of interest on gold loan since higher monthly salaries reassure that borrowers can return the loan amount without defaulting. On the other hand, applicants with low income profiles indicate a significant probability of defaulting, so the levied interest rates will be high to balance the lender’s risk.

  1. Credit score

Even though it is not the primary component in determining whether or not a gold loan will be accepted, the credit score is an important aspect for lenders when evaluating the interest rates on gold loans. Having a high credit rating, especially one of 750 or higher, reflects a borrower’s reliable repayment history and high level of dependability. As a result, lenders charge these applicants lower interest rates.

A credit score under 700, however, results in a higher interest rate. People must work to improve their CIBIL ratings in order to acquire the best offers and loans with low interest rates.

  • External factors

The market’s supply and demand imbalances, inflation, and other external factors are significant determinants of gold loan interest rates. In addition, the interest rates on gold loans are also based on the current gold market prices. Therefore, potential applicants should do thorough research on these external factors so that they can reap the maximum benefits from their gold loan.

The interest rates on gold loans determine the monthly EMIs for a borrower. In other words, if interest rates are low, a person’s repayment amount will be lower. It is crucial to compare several lenders in order to find out what interest rates they charge on gold loans and select the best deal. Securing a low rate of interest on gold loan will increase the affordability of the credit facility, thereby ensuring a smooth borrowing experience.  

In conclusion, individuals looking forward to applying for a gold loan in Vijayawada and other cities should keep in mind these few significant factors influencing gold loan rates in India. 

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