Gold loans have become an increasingly popular way for many Indians to access quick funds in times of financial need. With gold being a valuable asset for most Indian households, gold loans allow you to unlock the value of your idle gold jewellery and get a loan against it while still retaining ownership.
Gold loans tend to have lower interest rates compared to other unsecured personal loans. However, interest rates and terms can vary significantly between different lending institutions. As such, it is important to consider all the factors carefully before taking a gold loan. Here are some key low-interest gold loan factors to keep in mind.
Compare Interest Rates Between Financial Institutions
The interest rate is perhaps the most important factor to consider when opting for a gold loan. Interest rates on gold loans usually start anywhere from 9% p.a., depending on the loan provider. Generally, banks and Non-banking Financial Companies (NBFCs) offer lower interest rates compared to independent lending companies or fintechs.
When comparing interest rates between financial institutions, look at:
- Whether the gold loan interest rates are fixed or floating. Floating rates can fluctuate based on market conditions, while fixed rates remain constant throughout the tenure. However, floating rates carry the risk of increasing EMIs if gold loan interest rates rise later.
- The annual percentage rate (APR) rather than just the annual interest rate. The APR gives you a better idea of the true cost of the loan, including processing fees.
- Any special promotional offers or seasonal rates which are applicable only for a limited period. Don’t get tempted by low promotional rates, as the normal rates applicable later could be higher.
Research thoroughly and compare the total cost of borrowing before deciding on the loan provider offering the best low-interest gold loan.
Check the Loan-to-Value Ratio (LTV)
The loan-to-value ratio is the amount of loan you can avail against the value of your gold jewellery. This usually goes up to 75% of the gold value. The higher the LTV ratio, the more funding you can unlock against your gold. However, a higher LTV also represents a higher risk for the loan provider.
Financial institutions will assess the purity of your gold ornaments and provide a valuation based on the current gold price. Lower gold purity typically results in lower LTV ratios. Compare the LTV ratios that lenders offer to access maximum funds against your gold while keeping risks under control.
Look Out for Hidden Gold Loan Fees
Though gold loan interest rates are generally easy to compare between lenders, there can be various hidden gold loan fees and charges associated with the loan that you need to watch out for:
- Processing or documentation fees for loan application evaluation
- Penal interest rates or penalties for late repayments or interest servicing delays
- Advance part-payment charges for premature closure of the loan
- Valuation charges for assessing gold purity and value
- Locker charges for storing collateral gold in safe vaults or lockers
- Handling charges for gold jewellery
- Goods and Service Tax (GST) and other statutory taxes
To avoid surprises, read the fine print and get full clarity on all applicable one-time fees and recurring charges so that you can calculate the total cost of the gold loan. Choose a financial institution that offers greater transparency on fees.
Consider Gold Loan Tenure Options
Most banks and NBFCs provide flexible gold loan tenure options ranging from a few months to a few years for a gold loan. Some financial institutions even offer longer tenure loans going up to 5-7 years or more. The longer your repayment period, the lower your monthly instalments. However, longer tenure also means higher total interest outgo over the full tenure.
Evaluate your cash flow and repayment capability before choosing the ideal loan tenure. If you take a long-tenure gold loan, try to repay early, if possible, to reduce interest costs. Some loan providers may charge hefty foreclosure penalties, so choose an institution that offers minimal or no charges for early repayment.
Check How Gold Purity Affects Interest Rates
Generally, gold purity and loan rate are directly related to each other. That is, the purity of your gold jewellery may determine the gold loan interest rates you get. Interest rates are typically lower for loans against high-purity (typically 22 carats or above) gold ornaments than for loans against lower-purity gold.
So, it is important to check how different lending institutions classify gold jewellery - as high-purity gold, medium-purity gold or low-purity gold - and link their interest rates to these classifications.
Conclusion
Gold loans allow you to meet urgent financing needs in a quick and convenient way while retaining your precious gold assets. To understand how several low-interest gold loan factors are to be considered before availing a low-interest gold loan, do diligent research, assess your needs, and evaluate all aspects. The extra effort will ensure you make the most of your gold assets.
