Gold Loan Interest Rate Calculation: 5 Things You Didn’t Know

When it comes to financial planning, it pays to have a good understanding of how the interest rate of your gold loan is calculated. 


With the right knowledge, you can make the most of this type of loan and use it to your advantage. However, there are some important aspects of gold loan interest rate calculation that you may not be aware of. 


In this blog post, we will look at five things you need to know about gold loan interest rate calculation so you can make an informed decision.


The important role of gold in India

Gold is a precious metal that has been integral to India’s economy for centuries. Gold is a significant source of personal savings and investments and plays an important role in various financial transactions. As such, gold loans are a popular form of credit in India. In fact, according to the Reserve Bank of India (RBI), gold loans are one of the most preferred sources of short-term credit.


Gold holds an important place in Indian culture and society, as it is seen as a symbol of wealth and status. Gold is often used as collateral for loans, which has been a traditional way of getting credit in India. Gold loans are offered by banks and NBFCs (Non-Banking Financial Companies) in India and usually, come with attractive interest rates. 


Gold loans are particularly beneficial for those with insufficient income or creditworthiness to take out a loan from a traditional financial institution. This type of loan can use for various purposes, such as meeting emergency expenses, starting a business, or financing a wedding. However, it is important to understand how gold loan interest rate calculation works before taking out such a loan.


How is the gold loan interest rate calculated?

There are various factors to calculate gold loan interest rate:


  1. MCLR (Marginal Cost of Funds based Lending Rate)

The interest rate on the gold loan is generally linked to the bank’s base rate or the MCLR (Marginal Cost of Funds based Lending Rate). It means that the interest rate charged on a loan will be higher than the bank’s base rate. Generally, lenders look at four factors while calculating the gold loan interest rate- loan amount, loan tenure, loan-to-value ratio, and gold purity. 


  1. Loan amount

The loan amount is an important factor that is considered while calculating the gold loan interest rate. Generally, lenders provide gold loans up to 75% of the market value of the gold. The higher the loan amount, the higher the interest rate will be. The loan tenure is another factor that affects the gold loan interest rate. A longer loan tenure means a lower interest rate and vice versa. 


  1. Loan-to-value (LTV) ratio

The loan-to-value (LTV) ratio is another important factor for determining the gold loan interest rate. Lenders typically offer loans up to 75-90% of the gold value. The higher the LTV ratio, the higher the interest rate charged. 


  1. Purity of gold

Lastly, the purity of gold is also considered while calculating the interest rate. Gold with higher purity will fetch a lower interest rate than gold with lower purity. 


Thus, understanding all these factors is essential in order to get the best deal on your gold loan.


Why is gold loan interest rate so high?

The high interest rate is a result of several factors, including: 


  1. Risk of Default: Banks take on more risk when lending money against gold because gold can be easily sold in the market, so borrowers are more likely to default on their loans. This risk is reflected in the higher interest rates charged by banks for gold loans.
  2. High Transaction Cost: Gold loans involve a lot of paperwork, and the cost of conducting a thorough background check and evaluating the gold before giving out a loan can add up quickly. These costs are then passed on to the borrower as part of the interest rate.
  3. Limited Liquidity: While gold can be easily sold, its liquidation can be difficult and time-consuming. Banks typically require borrowers to pay back their loans in full before they can access the cash from selling their gold. It limits their liquidity and increases the interest rate they must pay to compensate for the delay.
  4. Low Collateral Value: Gold has a relatively low collateral value compared to other investment options like stocks and real estate. As such, banks need to charge a higher interest rate to compensate for the lower amount of money they are likely to get back if the borrower defaults.


These factors contribute to why gold loan interest rates are so high.


How can I reduce the interest rate on my gold loan?

Here are some of the best ways to reduce the interest rate on your gold loan:


Research Different Lenders: Many lenders offer gold loans, so it pays to compare their interest rates before settling on one. It will ensure you get the best deal.

Negotiate: Once you have identified the lender with the lowest interest rate, negotiate with them to get an even better deal. It’s not uncommon for lenders to be willing to lower their interest rates if they believe you’re a reliable customer.

Look Into Secured Gold Loans: Secured gold loans involve providing collateral, such as a savings account or fixed deposit, in exchange for a lower interest rate. It is ideal for those who don’t have a perfect credit history.

Pay On Time: One of the best ways to ensure you get a lower interest rate is by paying off your loan on time and without fail. Late payments can lead to higher interest rates, so make sure you pay back your loan on time and in full each month.

Opt For Longer Repayment Periods: Gold loans typically have shorter repayment periods than other types of loans, but opting for a longer period may result in a lower interest rate. Just make sure you can afford the longer payment schedule. 


By following these tips, you can get the best deal on your gold loan and save money.

Gold Loan Interest Rate Calculation


Why do banks charge a processing fee?

When you take out a gold loan, you will likely be charged a processing fee by the lender. This fee is charged to cover the administrative costs of the loan, such as verifying the borrower’s identity and income, verifying the gold’s purity, and other paperwork. Processing fees can vary depending on the lender but usually range from 1-2% of the loan amount. 


The processing fee is often considered when lenders determine the interest rate for the loan. Therefore, shopping around and comparing lenders is important to find the best rate possible. Additionally, some lenders offer discounts on processing fees if you have a good credit history or repayment record. 


Which bank is best for gold loan 2022?

When it comes to gold loan in India, you have a lot of options to choose from. Each bank has its own set of interest rates and terms and conditions. While most banks offer gold loans, the top five banks that offer the best gold loan services in India in 2022 are Axis Bank, HDFC Bank, Canara Bank, Muthoot Finance and State Bank of India (SBI). 


Bank Interest rate Loan Amount
Axis Bank 13.50% – 16.95% p.a. Rs.25,001 to Rs.25 lakh
HDFC Bank 11% – 16% p.a. Rs.10,000 onwards
Canara Bank 7.35% p.a Rs. 5,000 to Rs.35 lakh
Muthoot Finance 12% – to 26% p.a. Rs.1,500 onwards
State Bank of India 7.00% p.a. onwards Rs. 20,000 to Rs.50 lakh


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Closing In

Gold loans are a great option for those who need quick access to funds, but the interest rates charged on gold loans can be quite high. To get the best deal, it is important to understand how gold loan interest rates are calculated and which banks offer the best rates.


When it comes to gold loans, the most important thing to consider is the amount of gold you are willing to pledge and the bank that offers the lowest interest rate. Additionally, you should also factor in any processing fees as these can have a significant impact on your total repayment amount. Taking all these factors into account, you can make an informed decision when selecting a gold loan.


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