4 Interesting Facts About Gold Loan Interest Rates

Indians have been borrowing money against gold assets for centuries. Previously, local moneylenders dominated this activity. In fact, even today this informal channel caters to demand for gold loans to a large extent in villages and small towns.

However, with emergence of specialized gold loan companies over the last century, especially in southern India, the industry took an organized structure. This not only brought relief to borrowers from the usurious rates that local moneylenders charge, but also led to an evolution with best practices of general lending.

As a result, some basic practices became standard. Competition from fast-growing formal gold loan lenders led to better pricing or interest rate for the borrower and its regulation via the monetary authority created the right levers for growth of the industry.

In short, a gold loan involves an owner of gold jewelery using it as collateral to borrow money. The borrower pays interest on the money and repays both the original borrowed amount and the interest due. The gold article is returned and the loan account closes after the entire principal and interest is paid.

Gold Loan Interest Rates

The rate of interest is typically fixed at the time of availing the loan. Here are four interesting aspects of the interest rates charged by gold loan financers.

1. The interest rate on gold loan is the lowest for meeting short-term personal loan requirements. If one needs a short-term loan and has gold jewellery that isn’t being used, a gold loan should be preferred instead of a general personal loan. This is because a gold loan comes with a lower rate of interest that starts as low as 7-12% per annum depending on lenders
2. However, the rate charged on gold loan varies significantly based on various factors. Hence, all gold loans by all lenders are not necessarily the cheapest and some may entail interest rate as high as 30-35% per annum
3. The interest rate offered and charged by the lender is dependent on the amount of loan, tenure of the loan and the purity of the gold (ranging between 18-22 carat). A higher value of gold loan carries a higher interest rate. Similarly, gold jewellery made of lower purity has lower value and higher interest rate
4. The interest rate on a gold loan, unlike say a home loan, which is another form of secured lending product and comes with an optional variable rate that moves with policy rate, is typically fixed. But borrowers need to check and ensure that it is indeed to limit their equated monthly installments and not get a surprise after availing the loan

Key Takeaway

A gold loan is, in general, the cheapest form of personal loan but the actual interest rate can be high depending on various factors. Borrowers need to factor in aspects like loan amount, purity of the gold article and the tenure of the loan as all of them determine the actual interest rate charged.