What Most Lenders Don't Tell You About Gold Loan Interest Rates
I. Introduction
- Brief overview of gold loans and their growing popularity
Gold loans are one of the most sought after forms of lending in India. These are also one of the oldest loans in the Indian lending landscape. Reason being, the gold loans as a lending product are secured by the borrower’s gold collateral, which makes it a really secure form of lending for the lenders. Also, customer centric features such as ease of securing a loan, i.e. low hurdles to pass the gold loan eligibility criteria, straightforward and quick loan application model, lower interest rates compared to traditional forms of unsecured lending, and quick disbursal, has further boosted the popularity for gold loans in the modern lending market. Lenders like indiagolds offering customer centric solutions in their gold loan proposition have cemented gold loans position in the market as the preferred source of borrowing for many retail borrowers.
- The appeal: fast disbursal, minimal documentation, secured by gold
Gold loans have a lasting appeal on the borrowers, this appeal is based on the premise that these loans are fairly easy to avail, and often saves the borrowers the time and efforts which is otherwise required with other forms of loans. Lenders in the gold loan space are highly competitive, and apart from competitive interest rates, also offers other features of convenience which has resulted in an elevated appeal for these loans. For example, indiagold offers features such as low interest rates starting at just 0.85%* per month, low documentation required, disbursal in under 30 minutes*, high loan to value ratio (LTV), gold storage in secured vaults, insurance on the gold collateral, and much more! Features of such appeal makes it difficult for the borrowers to consider other forms of loans, when such a fantastic lending product is available in the market!
- Thesis: While gold loans appear simple, many lenders withhold critical details about interest rates that can impact borrowers significantly
Gold loans on the surface are a no-brainer lending product. While there are many lenders like indiagold offering genuine and highly desirable features on their gold loan offering and are absolutely transparent with the offering, there is some critical information which the borrowers may not be aware about, and is extremely important to know before taking a decision of availing a loan! Knowing these factors and information can help make a more informed decision.
II. The Basics of Gold Loan Interest Rates
- Types of interest rates:
- Fixed vs. floating interest rates : Generally, the lenders offer two types of interest rates, i.e. fixed and floating interest rates. As the name suggests, with fixed floating rate, the interest rate for the loan is decided at the start of the loan term, essentially fixing the repayments, and the total liability for the loan. Whereas, with floating interest rates, the interest rates for the loan is pegged against an underlying rate. This means that, if the underlying rate changes like the bank rate, etc., so does the applicable loan rate. Floating rates may be beneficial in times when you’re expecting rate cuts from the central banks, which can be beneficial for you, as it can essentially bring down the total liability.
- Monthly vs. annual interest rate presentation : Many lenders represent monthly interest rates and compare the same with annual rates offered with different lending products. This is not necessarily an accurate comparison, and gives a false sense of affordability to the prospective borrowers. It is important as a borrower to do a fair comparison, and then make a decision.
- Typical interest rate ranges in the market : The gold loan lending market is pretty competitive, although there can be various factors that influence these rates, for example - gold loan interest rate by loan amount, tenure, and collateral purity, etc. there are many lenders offering identical interest rates, hence if the rate of interest is the only basis of comparison for you, then it would be really difficult to choose a lender. Hence, for many borrowers, other factors or features of convenience help make a design while choosing a lender. Lenders like indiagold offers an extremely competitive rate, with their gold loans starting at just 0.85%* per month! Along with many features of convenience, making it extremely lucrative to avail a gold loan.
III. Hidden Truths About Gold Loan Interest Rates
- Teaser rates and promotional traps
- Initial low rates for a short period : Lenders in the unorganized sector may apply promotional interest rates, and later increase the said underlying interest rates, which essentially traps the borrowers into paying more money in the form of interest. Hence, it is important to only borrow from lenders in the organized sector i.e. who come under the purview of a regulatory body, and read all the related documents carefully, as information regarding the increased rates might be buried in the fine print of the documentation.
- Rate hikes after a few months : Rate change in the lending market is quite common, however ideally it should not affect an existing loan account. Some dishonest lenders may do so citing hidden terms and conditions, and make your borrowing much more expensive with an increased rate of interest.
- Monthly vs. Annualized Rates Misleading Presentation
- Quoting “1% per month” (which equals 12%+ annually) : Quoting monthly interest rates although is not an issue, however, this may mislead the borrowers since many would not be able to make a fair comparison between the actual annual rate of interest between gold loans, and other forms of lending. Hence, borrowers themselves should also ensure that they make an apple to apple comparison.
- The impact of compounding : Compounding is often referred to as the eighth wonder of the world. Compounding works great if you’re the beneficiary, however if you’re at the wrong side of it, then it often causes extreme harm financially. Many lenders may not explicitly express if the penalties or interest rates will be compounded or not. Hence, it is important to understand the applicability, effects, and the magnitude of impact it can have on the cost of borrowing.
- Loan-to-Value (LTV) and its influence on interest
- Lower interest rates for lower LTVs : The gold loan LTV ratio (loan to value) means the amount of loan that a borrower can avail from the lender as a function of the value of the gold collateral. Quite often, the lenders may offer low interest rates for lower LTV and vice versa, hence it is important to understand how the LTV works, the lender’s offerings, and the impact on your loan in detail.
- Risk-based pricing practices : Risk and returns are proportional in nature. For the lenders, the interest rates are reflective of the risk exposure they undertake for relaying a loan to the borrower. While the interest rates are pretty much comparable in the gold loan industry, risk based pricing models may be used by the lenders to determine the acceptable interest rates as per the risk level associated with lending to the borrower.
- Prepayment penalties and foreclosure charges
- Some lenders penalize early repayment despite the borrower reducing risk : This is because early repayment decreases the principal due, which in turn reduces the amount of returns that can be made in the form of interest payment. Hence, more often than not, the lender charges an early payment, or pre-payment charge in the charge schedule to discourage the borrowers from repaying the loan before the scheduled repayment plan. If a borrower were to read the charge schedule carefully, they would discover many charges that they may not be aware of. Hence, being aware is absolutely necessary before availing a loan.
- Hidden processing and renewal fees
- Costs that can increase the effective interest rate : Quite often than not, there are gold loan hidden charges that the borrowers are not aware of while availing a lona, and these come as a surprise at a later stage in the loan repayment. Such charges end up inflating the total cost of borrowing for the borrowers, and throws off the borrower’s repayment estimate. Hence, it is essential to understand the charge schedule in detail, and make a borrowing decision based on a thorough assessment of the applicable charges. With lenders like indiagold there are absolutely no hidden charges, furthermore a relationship manager gets in touch with you before you avail a loan to explain the process, you may ask all the questions during this process to be at ease, and only after that avail a gold loan!
- Penalty interest for missed payments
- How interest rates can balloon with penalties : Every missed payment attracts penalty charges, on the total amount of missed payment. Having these missed payments open/unpaid for a longer timeframe can have a detrimental effect on your finances, as the penalties depending upon the lender can be severe, and may also cause significant damage to your credit health!
IV. Real Cost vs. Advertised Cost
- How to calculate the true cost of borrowing
It is really important to understand the true cost of borrowing as it gives a fair idea on the real cost of borrowing from a specific lender, and more so with a specific product, and timeframe. To calculate the true cost of borrowing, one should account for all the costs incurred or to be incurred during the loan tenure such as interest payments, applicable charges such as processing fee, foreclosure charges, application fee, and so on.
V. How to Protect Yourself as a Borrower
- Ask for the annual percentage rate (APR).
- Read the loan agreement and fine print carefully : This would enable you to understand the true cost of borrowing, and implications of various charges, and circumstances. Reading the loan agreement in detail also enables the borrowers with making a more efficient and cost effective decision.
- Use online gold loan comparison tools : There are various online tools that can assist in the gold loan comparison. One such tool is the gold loan interest rate calculator, these calculator tools work in a way where you have to put in the relevant indicators such as the principal, applicable interest rates, loan tenure, etc. and it will help calculate the total cost of loan, this is a great assistive tool to compare offers by various lenders, and make an informed decision.
- Consider reputed institutions vs. NBFCs or local lenders : Borrowing from the reputed lenders can help mitigate many risks. Since, gold loans are collateral backed loans, giving custody of your gold collateral to lenders from the unorganized market poses significant risks related to loss of gold. Hence, it is important to only borrow from reputed lenders. Lenders like indiagold fares great in this regard, as indiagold is not only well regarded in the gold loan space, but also offers gold deposits in secure locker facilities, and insurance on the collateralized goals. Essentially mitigating the risk related to security of the gold collateral.
- Be cautious of overleveraging with frequent rollovers : By overleveraging frequent rollovers, you may end up inflating the total owed significantly. This can have a detrimental effect on your payment plan, and significantly boost your interest repayment.
VI. Questions You Must Ask Your Lender
- What is the effective annual rate?
Gold loan interest rate impact on EMI is high! The effective annual rate is essentially the actual rate of interest inclusive of applicable interest rates and charges on an annualized basis. Comparing loan offers based on the effective annual rate can help compare the loans more efficiently, as it allows the borrower to make a fair comparison not only between different gold loan providers, but also across different segments of lending products.
- Are there any hidden charges?
This is a crucial question to ask, to ensure that you’re not caught by surprise at a later date. Having a clear picture on the charge schedule can help you as a borrower to plan your repayment more efficiently, and avoid repayment related mishaps. Also, hidden charges like gold loan processing fees, loan foreclosure charges, etc. end up boosting the cost of loan, so having precise knowledge of these charges can also make a fair and efficient comparison between lenders.
- Is there a penalty for early repayment?
Gold loan prepayment penalties are attracted whenever the borrower makes an early repayment towards their outstanding principal. Many lenders charge a penalty or fees in case the borrower wants to make such a payment. This is to make up for the lost income in the form of otherwise payable interest on the principal difference. If you’re planning to repay the loan earlier than the schedule stipulates, then asking this question makes perfect sense, and is essential if saving cost on borrowing is your priority!
- What happens if I miss a payment?
Asking this question would help understand the repercussions better. This can throw light on the date on which the information is reported to the credit bureau. Having this information can help plan repayment, and ensure that your delay is causing expected, and minimal damage to your finances, and credit health!
