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Factors Affecting Gold Loan Interest Rates

For the approval of a gold loan, lenders look at factors that determine the interest rate. The lenders want to make sure their decision to lend is not a risky one.

Following are some of the important factors that determine the gold loan rate –

Income Level
  • Probably, one of the most important factors that a lender will consider while approving a gold loan. Lenders are more comfortable about your repayment capacity if the income level is high and hence might offer a lower interest rate. Lower-level income, however, might attract higher interest rates. It’s safe to say that income level and interest rates are inversely proportional.
Gold Market Price
  • The market prices of gold also determine the interest rates the lenders want to offer. Typically, the loan amount would be around 60-75% of the value of the gold article kept as collateral. If the gold market price is high, the value of the collateral also goes up and hence the lender’s risk goes down. The lender feels more comfortable in extending a low rate of interest. However, in case the gold prices are down, the lender’s risk increases, and the interest rates would go up.
Principal Loan Amount
  • The rate of interest also depends on the amount of the loan or the principal amount. The higher the principal amount is, the lower your interest rate would be. This is because the lender has a higher-value loan gold article pledged as security and hence they are comfortable offering a lower rate of interest.
External Benchmark Lending Rates
  • When the Reserve Bank of India (RBI) changes its policies/rates, the gold loan interest rates also change. The gold loan interest rates are believed to be linked to an external lending rate which could be the repo rate or the 10-year government bond rate. They have an impact on the gold loan interest rate also and are directly proportional.
Credit Score
  • Credit score is one of the most important factors looked at by lenders while approving a gold loan. The higher the score is, the higher the chances of the borrower getting an attractive interest rate. The lower your credit score is, the higher the interest rate will be most likely. It is best to always research all the options available for you and then proceed with the application for the loan.

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Gold Loan and its impact on the Credit Score

Applying for a gold loan itself doesn’t harm your credit score. But there are a few things to be kept in mind with a gold loan.

Gold Loan Application
  • Gold loan applications do not necessarily bring your credit score down. But, too many inquiries in a short period of time may indicate that you need a lot of funds. Lenders may perceive the situation as your inability to pay back the gold loan. Hence, avoid making too many inquiries too soon.
Gold Loan EMI Payments
  • Make sure you pay your gold loan EMIs on time. Failure to pay the EMIs before the due date will definitely lower your credit score. Here is what you can do to avoid this –
Make regular payments
  • Paying your EMIs on time will ensure your credit score will slowly go up. It shows great financial discipline on your behalf.
Avoid Loan Default
  • Loan default happens when you are not able to pay the loan back within the stipulated tenure. This delay is reported by the lender to the credit bureaus who will in turn perceive it as bad credit. If you do not pay the loan back for 90 consecutive days, you might get an NPA (non-performing asset) label on your credit report. This will lower your credit score further and also hamper your chances of getting loans in the future.
What are the advantages of a loan on gold?

It is a quick process: In India, gold loans are some of the quickest loans to be sanctioned as the banks have your gold as security in case of default. In many cases, you could walk out of the lenders office with the loan amount. The loan can be approved, over the counter, in a matter of minutes or a few hours. The loan amounts can range from just Rs.1000 (depending if you live in rural area) to Rs. 1 crore. The minimum and maximum amount lent varies according to the lender.

Quick disbursal
  • Many lenders can have your gold valued quickly and sanction the loan immediately, after verification of the purity and value of the gold. Unlike home or auto loans, a gold loan application does not require to go through multiple levels of approval.
Minimal documentation required
  • Since you are providing your gold as collateral, banks do not need the extensive documentation or long decision making process unlike in the case of a home loan or personal loan. With many lenders, all you need is one piece of photo ID and one piece of address proof, photographs and signature proof. The ID and residence proof documents include ration card, voter ID, driver's license, passport or Aadhaar card among others.
  • Another advantage of a gold loan is that you are not required to submit a salary certificate since your gold is used as collateral. So, even if you are currently unemployed or do not have a good credit score, you will still be eligible for this kind of loan. However, it is possible that for loans above a certain amount, some lenders might ask for a salary certificate.
  • Safe way to utilize an idle asset: Instead of storing your gold in a locker or at home, you can use it to raise money. Gold is a valuable asset that lies idly stored most of the time. At the same time, when you use your gold to get a loan, it will be physically safe with your lender during the loan period. You do not run any extra safety risk by using gold as collateral.
  • Lower interest rates: In general, interest rates on these loans are lower than on personal loans since the lenders have your gold as collateral. In addition, with some lenders, you may not have to pay a penalty on pre-payment of the loan.

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