Rs 1 Lakh Gold Loan : Interest Rate, Calculation, Benefits

Gold loan are convenient financial tools to help individuals in their times of distress. While personal loans are unsecured loans sanctioned on the basis of income and repayment ability of an individual, gold loans are sanctioned by accepting gold ornaments as security.

Gold loans are short-term loans that carry lower rates of interest than personal loans or credit card loans. The amount of money an individual can borrow against a gold item varies from lender to lender. While some lenders offer gold loans starting from Rs 10,000, there are a few who are ready to sanction loan amounts as less as Rs 1,500. Typically, up to 75% of the gold’s value is offered by banks and NBFCs as loans.

The value of the pledged gold is estimated as per the market rate of gold on the day of the loan application since the price of the yellow metal changes daily. The loan amount approved by lenders depend on the purity and weight of the gold. But the weight of the gold does not influence the rate of interest.

Instead, the interest charged on a gold loan depends on many other factors which are mentioned below:

• Market Price Of The Gold:

When the market price of gold is high, lenders offer a lower interest rate. This is because in such circumstances, the value of the pledged jewellery is high. Also, since the lender sanctions only up to 75% of the value of the gold as loan, it has the comfort of recovering the debt even if gold prices fall. As the risk involved is less, lenders offer lower interest rates on loans.

• Inflation:

Gold ornaments, etc. act as a hedge during inflation. During times of rising inflation people hoard gold because of the high gold price in the market. Opting for a gold loan during these times is ideal as most lenders offer loans at lower interest rate

• Existing Relationship With The Lender:

Many banks and NBFCs offer gold loans to their existing customers as they are already aware of their repayment history and creditworthiness. A good relationship with a lender can help secure lower interest rates and greater flexibility in repayment terms.

In addition, the loan amount and tenure are two other factors that determine the interest rate. The interest rate is higher if the loan amount is bigger and tenure is longer.

The interest rate on gold loans is to some extent influenced by the purity of the gold ornaments one pledges. It is worth bearing in mind that for a gold loan all the gold ornaments should match the financial institute requirement. The purity is verified by the jewellery appraiser in the bank or the NBFC. The weight of precious stones and gems embedded in the gold ornaments is not considered and is excluded from the calculation.

Factors Affecting Gold Loan Interest Rates

As the interest rate is one of the most important determinants of a gold loan, it would be helpful to know what impacts the interest rates. The following are some factors that impact the gold loan interest rates.

Loan Amount:

The amount of the loan and the jewel loan interest rate are directly proportional. A higher loan amount is charged a higher rate of interest as the risk factor is high in lending such a high-valued gold loan.

Market Price of Gold:

Another important determinant of the interest rate on a jewellery loan is the market price of gold. Gold is an international commodity, and its price responds to external factors and internal conditions. Factors such as global demand-supply, inflation, geo-political conditions, prevailing gold prices in the international market, and several domestic and local factors affect the market rate. When the market price of gold rises, the interest rate tends to fall, making gold loan repayment manageable.

Value of Pledged Gold:

This factor impacts the interest rate indirectly. If the value of the pledged gold is higher, the higher the loan amount will be and, thus, the higher the interest rate.

IIFL Finance offers an easy way to find the eligible gold loan amount after pledging the gold ornaments. The gold loan calculator on IIFL Finance’s website is the quickest way to know the eligible gold loan amount.

Benchmarking:

The rate of interest on a gold loan is determined using two benchmark methods. One follows the Reserve Bank of India’s Repo rate, and the other the MCLR-linked lending rate. The interest rate on the gold loan varies depending on the benchmarking method used. Generally, MCLR-linked lending rates result in lower rates by lenders.

Monthly Income:

One of the eligibility criteria for a loan against gold is the occupation status of the applicant. As repayment is an obligation that an applicant must fulfill, an applicant should be financially sound to service the loan. Hence, regular income is an important factor for the interest rate. If the income is not regular, lenders may not even approve a gold loan or charge a higher interest rate.

Repayment Frequency:

The frequency of gold loan repayment also affects the gold loan rate of interest. A borrower opting for a repayment plan with more frequent payments, such as EMIs, may be offered a lower rate of interest. While, infrequent payments or bullet payments generally attract a higher interest rate.

Credit Score:

A gold loan from IIFL Finance mandates valid gold loan documents but not a credit score. However, it may still affect the interest rate on the gold loan. If the borrower’s credit history shows defaults and a poor credit score. The lender will then charge the borrower a higher rate of interest.

Tips for Availing a Favorable Gold Loan

Even as lenders have policies and processes for their products and services, a borrower can negotiate for a gold loan. These are some of the points to keep in mind when negotiating a gold loan.

Use Gold Jewellery with Higher Gold Content:

A gold loan is calculated per gram of the gold content. When a borrower decides to pledge gold, loan amount will be determined by the amount of the gold content. Hence, one should pledge gold jewellery with the maximum content of gold in it. However, only the maximum gold LTV ratio of 75% will be given as a loan. Hence, one should pledge gold with a few gems and stones. Lenders take into account only the net content of the gold jewellery.

Undеrstand Loan Tеrms:

Bеforе availing a gold loan, carеfully undеrstand thе loan’s tеrms and conditions, including the interest ratе, loan tеnurе and the rеpaymеnt options. Compare the offеrings from diffеrеnt lеndеrs to еnsurе you choosе thе onе that bеst suits your financial nееds.

Rеputation of thе Lеndеr:

Choose a reputable, еstablishеd lеndеr with a history of fair practicеs. Read customer reviews, chеck thе lеndеr's crеdibility and еnsurе that they comply with rеgulatory standards.

Gold Loan Fees and Charges

It is a known fact that besides the rate of interest, there are other charges applicable on a gold loan. IIFL Finance has furnished information about their gold loan rates and charges on its website. The charges and fees are as follows:

Processing Fee:

The processing fee varies depending on the gold loan scheme availed. Some of IIFL Finance’s other gold loan-related products are Agriculture Gold Loan, Education Gold Loan, Gold Loan for Women, Gold Loan for MSME, and Digital Gold Loan.

MTM Charges:

The mark-to-market charges ensure that your loan aligns with the current market value of your pledged gold. This is important to maintain the accuracy of your loan valuation over time. The MTM charges are a flat Rs.500.

Auction Charges:

Auction charges apply in the event of a default. These are Rs.1,500. Overdue Notice Charges are incurred for notifying borrowers about the auction process and the administrative expenses linked to the auction process.

SMS Charges:

These are the charges for sending notifications about your gold loan. They are charged every quarter and are payable on the closure of the loan. The SMS charges are Rs. 5/quarter.

What Is The Interest For Rs 1 Lakh Gold Loan TO Be Paid?

Currently, most lenders offer gold loans with interest rates starting around 10% and going up to 30% per year. Most lenders provide an online interest or Gold loan EMI calculator to help borrowers figure out the interest they would have to pay. Let’s understand this with the help of an example where a borrower needs a loan of about Rs 1 lakh.

At current prices of gold, the borrower would have to provide about 27.18 grams of gold jewellery to the lender as collateral to take out a loan of Rs 1 lakh. Assuming the interest rate at 10% per annum and the tenure of one year, the total interest to be paid would be Rs 5,499 and the EMI would be Rs 8,791.

If the rate of interest is kept at 10% but the tenure is changed to two years, the interest amount would increase to Rs 10,747 while the EMI would fall to Rs 4,614. Conversely, if the tenure is kept at one year and the interest rate is increased to 15%, the total interest payout would be Rs 8,309 and the EMI would be Rs 9,025.

Calculating Interest on a Rs. 1 Lakh Loan

One of the most important determinants when applying for a gold loan is its interest rate. There are two ways lending institutions calculate the interest rate on a gold loan. They are the flat interest rate and the reducing balance interest rate methods. Generally, loans use the reducing balance interest rate method.

Here, the interest is calculated on the outstanding balance. This balance declines with every payment towards the principal. Along with this, the interest component also declines over time.

We will look at this method using an example. Suppose the loan amount is Rs. one lakh, and the borrower is charged 12% per annum for 12 months, then the interest calculation looks like this.

Interest for the first month = (Principal * Interest rate) /12 months = (1,00,000 *0.12)/12 = Rs. 1,000.

Interest payment in the second month will be = Rs. 1,00,000 - Rs. 1,000 = Rs. 99,000.

Then, (99,000 *0.12)/12 = Rs. 990.

The interest payments for the subsequent months are calculated similarly.

Benefits of Gold Loan

• A gold loan offers immediate access to capital.
• No external collateral is required.
• Gold loans offer easy liquidity on an asset that is lying idle.
• Besides visiting the lender’s branch to apply for a loan, lenders also provide the gold loan online option to apply for a gold loan.
• Also, lenders may offer the gold loan at home option to borrowers.
• The application process for a loan against gold requires minimal paperwork, thus saving time and offering quick disbursals.
• There is generally no need for a credit score.
• The rate of interest is among the most competitive in the industry.
• The gold loan can be customized as per the borrower.
• The proceeds from the loan amount can be used for any legal purpose, such as personal, professional or educational needs.
• If the gold loan proceeds are used for home improvement, construction or purchase of a residential property or as a business expense, Section 80C allows gold loan tax benefits.

Conclusion

To avail a gold loan, the borrower must give gold jewellery to the lender against which the loan amount is provided. The minimum repayment tenure in a gold loan is three months and it can go up to a maximum of five years depending on the loan scheme available.

Anyone who is 18 years of age and has gold ornaments along with supportive documents to prove the ownership of the gold can apply for a gold loan. The lowest gold loan interest rate are relatively lower than other types of loans. But it is good to have a prior idea of the gold loan interest rates before finalizing the loan.

Most importantly, you should take out a gold loan only from reputed lenders such as IIFL Finance, one of India’s top NBFCs. IIFL Finance offers gold loans with a minimum loan. The maximum repayment tenure of IIFL gold loan is up to two years. To calculate the EMI, you can use the gold loan interest rate calculator online and get the exact figures in a few minutes.