Most Indian households possess some amount of gold, irrespective of their financial standing. Additionally, this yellow metal has high liquidity, allowing individuals to raise funds during any financial emergency. Moreover, an affordable gold loan interest rate is another viable reason individuals opt for this financing option.
These are the factors that contributed to the growth of the gold loan market in India. As per a recent report, India’s organized gold loan market is expected to witness a 15.7% CAGR to reach Rs.4,61,700 crore in 2021-22.
However, individuals can follow some helpful tips to make the most of this favourable time for borrowing and can qualify for the best interest rate on a gold loan.
Ways to get the lowest gold loan interest rate
Being a secured credit, an interest rate of a gold loan is typically reasonable. Still, individuals can consider the following pointers to secure the best interest and other benefits:
- Check gold purity
Individuals need to pledge gold ornaments with high carat marks to enjoy an affordable gold loan interest rate. Usually, lenders approve this fund against gold articles with 18 carats to 24 carats. Needless to say, carat count and gold purity are directly proportionate.
Depending on gold quality, lenders also determine the LTV. As per RBI’s guidelines, individuals can avail up to 90% of the current valuation of gold as a loan. Besides, a higher carat measure also ensures the best per gram value of the gold pledged.
- Decide the loan amount carefully
Although borrowers can avail of a loan of up to 90% of the gold’s current market value, the principal amount impacts the interest rate levied on it. Since the lending risks increase with a higher loan corpus, financial institutions levy a higher gold loan interest rate.
Hence, individuals should consider the loan amount before applying. It will help them to get a competitive interest rate. Individuals can also use a gold loan eligibility calculator and input the ornament details as in weight and carat to check the maximum loan amount they are eligible for.
- Boost monthly income
Lenders also assess the monthly income of borrowers before deciding on a gold loan interest rate. Since the eligibility parameters of gold loans are lenient, lenders depend on this particular one to ascertain the timely repayment of this credit.
Hence, borrowers with a steady and higher monthly income will likely enjoy affordable interest rates on a gold loan. A high monthly income also indicates that borrowers can repay the loan on time. However, in that case, they should also consider the debt-to-income ratio, which should be ideally below 50%.
- Compare different lenders
Like other credit products, the interest rate of a gold loan also varies with lenders. Hence, it is imperative for borrowers to compare these rates online to secure the best possible one. In this regard, they can also access a gold loan calculator. It will help them estimate the total interest payable and decide the tenor accordingly.
For instance, NBFCs like Bajaj Finserv extends substantial gold loan at a competitive interest rate. Moreover, they offer a host of benefits on this credit, such as a part-release facility and a complimentary gold insurance policy.
However, besides following the tips to avail the lowest gold loan interest rate, the macroeconomic factors also influence this rate, like benchmarking method.
Know how benchmarking methods impact a gold loan interest rate
The gold loan interest rate also depends on the benchmarking method a lender follows. It can be either MCLR linked lending rate or a repo rate-linked lending rate.
Moreover, you must know that the gold loan interest rate linked with RLLR is revised every three months. On the other hand, MCLR linked interest rates are revised every six months or one year. Hence, depending on the change, the monthly payment will also alter.
However, the interest rate of loan against gold impacts whenever the Reserve Bank of India revises the repo rate, regardless of the benchmark system your lender follows.
Besides the affordable rates, individuals should also know how to reduce the gold loan interest burden by following some simple tips.
Tips to reduce gold loan interest
Besides securing a reasonable gold loan interest rate, individuals can limit the gold loan interest outgo by following some tips.
- Choose a shorter tenor
Typically, a gold loan accompanies a tenor of up to 1 year. In some cases, it can go up to 5 years. However, to decrease the interest outgo, borrowers can choose tenor as short as possible. This way, the interest payable will remain under check.
However, in that case, the EMI payable can be high. But again, most lenders offer flexible repayment schedule which includes various options besides EMI regime.
- Opt for part-prepayment
Besides choosing a short tenor, individuals can also opt for part-prepayment facilities. This option allows borrowers to pay a lump sum before the tenor ends. Note that during part-prepayment, the amount goes towards principal repayment. Therefore, with a reduced principal amount, the interest burden will decrease as well. Hence, besides knowing the ways to secure the best gold loan interest rate, individuals should also keep the pointers to reduce their debt in mind to make an informed borrowing decision.