Understanding Gold Loan Interest Rates: What to Expect
What are Gold Loans
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Definition and purpose of gold loans
A gold loan is a secured loan wherein the gold is put as collateral to receive cash in return. There is a great demand for gold loans due to the low rate of interest and quick disbursal. The flexible repayment plans of gold loans help the borrowers by providing them easier financing.
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Common uses for gold loans (e.g., emergency funding, business expansion)
In case of an unfortunate or unforeseeable event, an individual may need immediate money to manage the expenses.
Also, Gold loans are viable for financing the business needs; whether it's for the expenses towards the start of the business, working capital requirements, expansionary projects like launching new products or expanding into a new market, purchasing machinery, etc., or even for petty and major expenditure, gold loans are a suitable means of acquiring funds since they ensure quick processing and easy approvals.
What affects Gold Loan Interest rates?
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Loan To Value (LTV)
Loan to value essentially means the amount of money that can be borrowed against putting gold as a collateral in relation to its value. High LTV means a high amount of loan disbursed as a percentage of the gold value and vice versa i.e. gold loan per gram based on the market value. As per the Reserve Bank of India (RBI) guidelines, the maximum LTV that be given by the lenders is 75% i.e. a loan of maximum 75% of the gold value can be borrowed.
This is one of the major factors that dictate the interest rates offered by the lenders as a person availing low amounts of loan against collateral of higher value can help them secure better lending interest rates, and vice versa.
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Gold Purity
Gold purity plays an essential role in determining how much money can be borrowed and the interest rates being offered. Different purity levels i.e. 18k, 22k, 24k may all have different LTVs, and interest rates offered by the lenders. To avail loans of higher LTV and lower interest rate, a borrower may consider pledging gold with higher purity
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Repayment Tenure
Repayment tenure is one of the biggest determinants of interest rates irrespective of the loan type. For general gold loans, the standard repayment terms are kept at one year, where the borrower has to make monthly interest payments and repay the principal amount at the end of one year. However, for whatsoever reasons, if the borrower wishes to have a longer repayment period, or flexibility in repayment i.e. bi-monthly interest payments (if offered by any lender), then it may result in higher interest rates
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Market Trend & Lender Policy
Market trends are one of the biggest determinants of interest rates, be it for borrowing or for investing. The gold loans industry is no different, if the underlying gold bank rates increase, it results in an increase in the lending interest rates too, and vice versa. Not only the bank rates, other lender specific factors such as lending policies, and terms and conditions may greatly influence the interest rates offered to a borrower. Hence, it is absolutely essential to opt for a gold loan from a lender who offers low interest rates and favourable loan terms and conditions. Lenders like India Gold, offer gold loans at an attractive interest rate.
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Credit Profile of the Borrower
A borrower’s credit profile indicates their creditworthiness, which is a great determinant of the risk associated with lending them the money from a lender’s perspective. A borrower with a solid credit profile may be able to secure loans easily and at favourable interest rates and terms and conditions and vice versa. Hence, from a borrower’s point of view, it is important to ensure that they take steps that increase their creditworthiness.
A borrower may keep their credit utilization low (It is advised to keep it below 30%), an individual should ensure that they do not have any credit defaults, or outstanding repayment, as it can impact the credit profile negatively.
Types of Loan Interest Rates
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Fixed Rate
Loan interest rates can be of various types, one among many types or forms of interest rates is the fixed rate of interest. Loans with a fixed interest rate will have a constant interest rate throughout the loan term. I.e. fluctuations in the interest rates will have no impact on the interest rate that is to be paid by the borrower. Loans with fixed interest rates are advantageous where the inflation rate is high, because as a countermeasure to control inflation, the government increases the interest rates, which can increase the total cost of capital in case the loan interest rate is not fixed.
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Floating Rate
Opposite to the fixed interest rates, the lenders also offer floating interest rates in some cases (Very rarely seen in the case of gold loans). These loans do not have a fixed interest rate component, but the interest rate keeps on changing as per the market rates. These rates are advantageous in cases where the central bank is expected to cut rates, as it can help decrease the cost of capital. Floating rates are usually pegged against the bank rate with a fixed amount of extra basis points as the lender’s income.
How to get best Gold Loan Interest Rates
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Compare Lenders
Before availing a loan, the borrower must ensure that they do some checks and balances to save money on the gold loan rates. The primary check being comparison between the lenders. Interest rates offered may vary greatly depending upon the borrower’s credit profile and also the lenders. It would make the most sense if the borrower can check various lenders for the interest rates on offer and the general loan terms and conditions affecting the total cost of borrowing and repayment. Even if you want to avail a gold loan today, it still makes sense to compare lenders as the process of comparison is fairly quick and simple.
Lenders like India Gold offer one of the lowest interest rates in the market, making it a no brainer for the borrower to opt for a gold loan from India Gold.
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Borrow against high Purity Gold
High purity of gold makes for a better collateral, which essentially means that the borrower putting gold of higher purity as a collateral would be able to secure a higher loan amount. The nature of the collateral also dictates the risk level of the lenders associated with borrowing to a particular borrower. A collateral with high purity and market value may enable the borrower to secure a gold loan at a lower interest rate from certain lenders. This is subjected to the lender’s policy.
Risks Associated with High Interest Rates
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Potential financial strain and consequences of high rates
A loan with high interest rates implies that the borrower would have to pay higher amount in repayment, as higher interest rates boost the cost of debt which is directly proportional to the repayment size. If a borrower secures a loan with a higher interest rates, then it can become counterproductive, as the borrower may find themselves in a position where they are having difficulties in paying off the monthly repayments, essentially increasing the pressure, and financial strain which could’ve been avoided had it been a loan with a lower interest rate.
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Risk of losing your gold if unable to repay
Gold loan as a product is designed in such a way that the borrower is able to secure debt funding from a lender by keeping their gold as a collateral. Collateral works as a risk hedge for the lenders, as in a case of default, the lender may liquidate the collateral to recover outstanding amounts.
Failing to make repayments may force the lender’s hand to liquidate the collateral i.e. the borrower’s gold to recover dues, hence it is one the major risks when it comes to borrowing with a collateral in place
Conclusion
Gold loans are one of the most in-demand secured loans whereby people pledge their gold to get funding instantly. This kind of loan has become popular due to two major reasons: low interest rates along with fast approval, flexible repayment options, and the fact that some gold loans come with affordable charges. Gold loans are availed for emergency funding, expansion, or to meet different financial requirements. Be it urgent expenses, investment in machinery, or expansion of the business, gold loans offer immediate cash flow, therefore, funding at the hour of need.
The interest rates charged on gold loans are dependent upon a number of factors. Probably the most crucial one is the LTV ratio. The ratio expresses the loan that can be taken against the value of gold pledged. More the LTV, the higher is the loan sanctioned, but may attract a higher rate of interest too. The purity of the gold also impacts the terms of the loan, and high-purity gold offers lower interest rates and higher amounts of loans. The tenure for repayment also matters; longer tenures may lead to higher rates. Market trends, lender policies, and the borrower's credit profile all play a very important role in setting the interest rates.
