How Is Interest Rate Calculated For A gold loan?

While availing a gold loan from a lender, there are a few factors that affect interest rate. Here are some factors you should know before you avail gold loan!

23 Sep,2022 10:48 IST 7 views
How Is Interest Rate Calculated For A gold loan?

A gold loan is considered one of the best options to meet short-term financial needs. This is especially true for emergency cash needs at a personal level and even for covering the financial requirements at one’s business.

A gold loan is also a good way to build a credit history, especially by those who are entering the workforce and plan to take any form of loan in the future or even for business persons who intend to take a business loan but have not taken personal loans in the past.

In this, a borrower needs to pledge some self-owned gold ornaments with a lender to get money. The amount one can borrow and the interest rate charged depends on various factors including the weight and purity of gold in the jewellery, among others.

One needs to be keep in mind that only the value of gold in the jewellery is taken into account while arriving at a loan eligibility criterion and the value of stones or other metals is discounted outright.

The lender gives money to the borrower, who in turn can use it as he/she deem fit. To get the jewellery pledged and stored with the lender as a collateral, the borrower needs to pay back the money borrowed along with the interest and other associated charges.

The interest rate charged by the lender depends on multiple factors. But there are essentially three key factors that determine the interest rate.

Loan Amount:

The most important factor is the loan amount. The loan amount itself is dependent on the weight of gold and the purity of the yellow metal in the jewellery or gold coin. However, the interest rate offered itself is partly based on the loan amount. So, if the loan amount is high, the interest rate charged is higher.

Monthly Income:

The gold loan is a secured loan product and as long as the weight of the gold along with its purity is enough to avail it. But lenders also assess the loan terms based on the repayment capacity of the borrower and the monthly income is not a factor to determine eligibility for a gold loan. Still, it does affect the interest rate and if the monthly income is low, lenders charge a higher interest rate due to the higher risk of default.

Credit Score:

For the same reason, the credit score of the borrower also comes into play. A lower score may not disqualify the borrower from taking a gold loan but it also comes with higher interest rate. If the borrower has a high credit score, lenders offer a lower interest rate.

Conclusion

A gold loan is often the most efficient way to get money for emergency use. It comes with the lowest rate compared to other forms of personal loan as the value of gold covers the risk of giving money for the lender.

However, there are factors that affect the interest rate on gold loans. These include aspects like the size of loan, income of the borrower and credit score, among other factors like inflation, gold price movements and tenor.

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