Gold is considered an ideal asset by most Indian households. Passed down as heritage, gold articles hold substantial value in the market.
This is why most individuals lean on high-value secure credit forms like gold loans during financial emergencies. To comply with this demand, multiple lending institutions levy a nominal gold loan interest rate. Additionally, the RBI’s decision to maintain the repo rate at 4% has made the borrowing rate feasible.
To understand how the rate of interest on gold loan works, one needs to understand the calculation method.
How is the gold loan interest rate calculated?
The gold loan interest rate calculation is done by deducting the principal amount from the total amount to be repaid at the end of the tenor. Depending on the interest component, individuals can make repayment.
Borrowers can also evaluate their EMI structure by employing the simple formula P × r × (1 + r)n/((1 + r)n – 1). Here P stands for the loan amount, r stands for interest rate, and n denotes tenor or number of months.
For instance, a borrower avails a gold loan of Rs.2 lakh for a tenor of 20 years. The interest levied on the loan is 6%. They are obligated to repay a monthly EMI of 1,433 and approximately a total interest of Rs.14 lakh.
To ease out this complex calculation, individuals can use an online gold loan EMI calculator. This smart tool gives a detailed breakdown of the repayment obligation when tenor, interest rate, and loan amount is entered. Borrowers can tweak these figures until they reach a suitable interest rate. This will also help them compare lenders and find the one that levies the lowest gold loan interest rate.
In terms of repayment, a gold loan extends multiple options. An individual can opt for a traditional EMI structure or pay the interest periodically and principal at the tenor end. They can also choose to repay interest upfront and principal later.
Availability of these options and affordable interest rate contributes to the growing demand for a gold loan among borrowers. Doubling up of gold loan segment in India to Rs.6,064 crore as of 31st March 2021 substantiates this fact.
However, focusing on the benefits won’t make the borrowing successful. Instead, potential borrowers should have detailed knowledge of the factors impacting gold loan interest rates.
What are the factors that impact the gold loan interest rate?
The gold loan interest rate differs from one lender to another. The factors like the purity of gold and LTV ratio impacts the loan amount sanctioned by the lender. Some other factors are-
- Inflation
Inflations can raise the demand for credit forms like a loan against gold. Technically, the value of a currency drops drastically, forcing individuals to look for secured funding alternatives. Moreover, as the value of gold increases, individuals can gain affordable interest rates on gold loans.
- Current gold price
When the market price of gold rises, chances of leveraging gold ornaments’ equity also increase. Lending institutions are obligated to levy affordable interest rates if a borrower mortgages multiple gold articles. In a situation like defaulting, lenders can take care of the losses by auctioning the securities.
- Relationship with lenders
Lending institutions are flexible about CIBIL scores. However, maintaining a healthy credit report and repayment history leverages a borrower’s reliability. Disclosing additional income sources will again ascertain one’s repayment capability. As an asset-backed credit option, financers will agree to borrowers’ demand of levying a reasonable interest rate on gold loans.
- Global movement of gold price
Even the slightest change in gold price globally can impact the gold price in India. This is because India is the largest gold importer. Gold is always seen as the compatible financial source by borrowers; therefore, demand for a gold loan increases during economic turmoil. To leverage this demand, lenders extend suitable interest rates on this credit form.
These are some essential factors that impact a gold loan interest rate. Individuals should evaluate their financial stability and current market condition before making a loan application. Additionally, one should keep a tab over the updates made by RBI regarding the LTV ratio. This will help them make the most out of their gold possessions.
