What Most Lenders Don't Tell You About Gold Loan Interest Rates

A gold loan is a type of secured debt in which the borrower pledges their gold asset in the form of jewellery as security in exchange for cash. The gold jewellery is held by the lender as collateral for the loan. And once the loan has been repaid the jewellery is returned to the borrower.

Gold loans have emerged as a popular means of raising funds as it helps one to make use of a latent asset that is otherwise stored away in the bank or a locker at home. The ease of securing such a loan with minimal documentation and in a short period of time has also made it one of the most convenient forms of raising funds.

However, one should conduct proper due diligence before submitting their precious gold asset to ensure that they are able to service their loan on time or else they end up losing their gold. So, one must take note of what most lenders do not disclose about gold loan rates.

Determine The Loan To Value Rate (LTV)

The loan-to-value rate or LTV ratio is the maximum allowed gold loan per gram rate, which will be applied at the present market price of gold, for approving the loan amount. The present LTV ratio for gold loans is 75%. Therefore, a lender can sanction up to 75% of the value of the secured gold, however, the lender’s internal policies will also have a bearing on the value of the loan.

Know The Rate Of Gold

The value of the gold loan that will be disbursed is determined by the current gold market price.

As a result, if the price of gold has decreased, the amount of the sanctioned gold loan will be reduced. Gold loans are offered against only the value of ‘gold’ in the jewellery after deducting the weight of any stones or other embellishments as they don’t have a standard value benchmark.

Compare To Get The Best Gold Loan Interest Rate

As with any purchase, one must research and compare the interest rates offered by different institutions for gold loan, as each lender has their own policies and regulations. It is also beneficial to know the offers, documentation required and lending criteria for each lender.

Have Knowledge Of The Quality Of The Gold

Gold purity is indicated by the karat scale and any financier who offers a gold loan will first examine the gold purity and quality before processing the loan and offering a good interest rate. Based on the evaluation, the gold loan per gram rate for loans secured by gold would be determined. Gold ornaments are typically between 18 and 22 Karat in purity, wherein a loan secured by 22k gold will be worth more than one secured by 18K gold.

Opt For A Reputed Licensed Lender

While there are a number of local pawn shops and small money lenders that offer gold loans at cheaper rates, it is critical to opt for a bank or licensed non-banking financial company to ensure that your gold is safe. It is also advisable to check the lenders’ credit rating that will show if it has been in business for a long time and proven itself trustworthy.

Ensure Comfortable Repayment Terms

One must make a considered plan about repayment of the gold loan depending on their financial situation and income flow to avoid a default. Borrowers may opt to pay the principal amount first by asking their lenders to make their repayment schedule such that they first pay off the principal amount in multiple installments, and then repay the interest. This way, they stop accruing any extra interest on the unpaid principal amount, thereby bringing down the interest cost.

Offer A Non-Gold Asset As Collateral

One can also reduce the cost of borrowing on the gold loan by offering another asset such as land, real estate, fixed deposits, stocks or anything else that has value, as collateral. However, the borrower must ensure that the asset being offered has not been pledged elsewhere. The lender will value the non-gold asset separately and offer a lower, blended rate of interest.

Conclusion

The rate of interest applied to a gold loan is determined by a variety of variables. These include the size of the loan, the quality of the gold used as collateral, the borrower's credit score, monthly income, and external benchmarking.

Based on these factors related to the borrower, the same lender may charge very different rates for the same weight of gold jewellery pledged as a security. Therefore, borrowers should look into the lender's technique of interest calculation and choose one that offers loans with simple interest.

While there is a wide unregulated market out there, comprising local lenders and pawn shops, it is advisable to take a gold loan from a reputable lender like IIFL Finance, as they offer a hassle- free process, with attractive interest rates and at a very nominal cost.