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How do NBFCs Determine Gold Loan Interest Rates in India?

According to the Finance Industry Development Council (FIDC), uptake of gold loan interest and Gold loan in India has increased to Rs. 1,333 crore. 

Due to the popularity of these loans, Non-Banking Financial Companies (NBFCs) are providing attractive benefits to borrowers. However, the gold loan interest rates depend on multiple factors.

Read on to know what influences the interest rates on these loans.

Factors influencing gold loan interest rates

Although the criteria for availing of a gold loan are not strict, lending companies take into account specific checks before approving the loans. Furthermore, they decide the final interest rates depending on multiple factors.

Following are the things that determine the interest rates on gold loans-

1. Loan amount

The loan amount plays an essential role in determining the interest rates. The amount of money an applicant can get by pledging gold items depends on the overall value of their asset. 

Depending on the asset’s value, individuals can get loans of up to Rs. 2 crores from financial institutions. Moreover, lenders also consider this value to determine interest rates. But borrowers should know that the higher the loan amount, the higher its interest rates will be. 

2. Market price of gold

Lenders usually provide a 75% loan-to-value (LTV) ratio on items pledged while taking a gold loan. The value of those items determines the overall loan amount that person can get. Similarly, values of those items will increase when the gold market value is high. 

In such scenarios, lenders can offer low-interest rates on the loan since high market value of gold decreases risk factors associated with gold loans. If borrowers default on payments, they can sell pledged items and easily get back the loan amount.

3. External landmark rates for lending

The gold loan interest also depends on an external benchmark which influences rates of other loans. There are 2 main benchmarking methods that most lenders stick to, namely- MCLR-related lending rate (internal) and RRLR (external).

Interest rates vary across lenders depending upon which method they follow for loan rate assessment. When the Reserve Bank of India (RBI) changes its policy rates, it also modifies the interest rates that lending institutions provide. 

4. Borrower’s monthly income

Compared to other loans, getting a sanction on gold loans is easy. However, an individual’s monthly income is vital in determining interest rates. Having a high monthly income ensures low rates of interest on the loan,

This is because; higher the monthly income of a person, higher will be their capacity to repay the loan. This provides more security to the lenders and assures them of the borrower’s ability to quick pay gold loan amount quickly. As a result, they offer affordable rates of interest. 

The credit score is an essential factor that people should be aware of before taking a loan. A CIBIL score of 750 or higher is considered ideal when a person opts for a loan.

Although people with a lower CIBIL score are still eligible for a gold loan, borrowers should try to maintain a high credit score. This is because the score indicates a person’s creditworthiness and ensures better chances of getting lower interest rates. 

Checking and comparing gold loan interest rates is the first thing any prospective borrower should do before availing of a loan. People should not rush into getting one with high-interest rates since it also affects their ability to quickly pay gold loans and become debt free. Since increased interest rates will also mean high EMI payments, applicants must find ways to attain the most affordable interest rates. 

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