Gold loan is a type of secured financing option that lets you borrow against gold ornaments and coins. As per Reserve Bank of India (RBI) guidelines, a lender can give you a maximum of 75% of your gold’s value. Since gold prices fluctuate on a daily basis, most lenders will estimate the value of your gold as per the market rate of gold on the day you apply for the loan.
The interest rates on gold loans typically start at as low as 7% and go up to 18%. The loan amount and borrower’s income are the two major factors that determine interest rate.
The bigger the loan amount, the higher will be the interest rate you have to pay. A regular and high income can help you bag a lower interest rate. The loan value is a direct function of the weight of your gold ornament.
“If the gold ornaments are studded with precious stones, the weight of such added pieces will be excluded during the valuation process to determine the value of the gold pledged,” said Raj Khosla, founder and MD, MyMoneyMantra.com.
Purity of the gold doesn’t influence the rate of interest to a large extent. “There is no direct correlation between the purity of gold and the rate of interest. In some cases, say when the pledged gold is 18k in purity, the applicable rate of interest may be marginally impacted,” said Khosla.
“ Credit scores have no bearing on interest rates. First, gold loans do not require the borrower to have a credit score. Since the lender holds at least 25% over and above the value of the loan as collateral in loan, they are willing to lend even in the absence of the credit score,” Adil Shetty, CEO, Bankbazaar.com said.
Some NBFCs and banks charge a foreclosure fee of up to 2% (excluding GST) if you repay the loan before a pre-determined repayment window, which is typically 3-6 months, and a processing fee of at least ₹500 or 0.5%-2% of the loan amount.
“Banks and NBFCs charge foreclosure fees, while almost all of the new-age digital lenders only charge an interest rate,” said Khosla.
Personal or gold loans?
Since gold loans are given against collateral, interest rates are relatively cheaper compared to personal loans. They also give better repayment flexibility.
“Gold loans allow multiple repayment options, which include regular EMIs, bullet repayment method, staggered interest payment while the principal is paid at the end of the tenure and upfront interest payment is made at the start of the loan and principal at the end. Personal loans don’t give such flexible options. Also, the typical loan tenor of gold loans is shorter at 1-2 years,” said Shetty.