Gold loan providers like Non-Banking Financial Companies (NBFCs) offer loans against gold jewellery as collateral at attractive interest rates. But how exactly is the gold loan interest rate in an NBFC determined? Let's find out.
Borrower's Credit Profile
Several assessment factors like credit history, credit score, and income verification help in understanding the loan applicants’ profile. These factors influence the gold loan interest rate in NBFC to a great extent:
| Assessment Factor | Description | Impact on Interest Rate |
| Credit History | Review of the borrower’s past repayment behaviour. | Good history = Lower interest rate; Poor history = Higher interest rate due to perceived risk. |
| Income Verification | Verification of the borrower’s income to assess repayment capacity. | Stable income = Lower interest rate; Insufficient income may lead to higher rates. |
Gold Evaluation
The next step is the gold evaluation process. Check out the table, as we have discussed in detail:
| Evaluation Process | Description |
| Purity Assessment | Ensures gold meets minimum standards (18, 22, 24 carats, or others) required by the NBFC. |
| Weight Measurement | Measures gold weight to calculate the market value, thus determining the maximum loan amount. |
| Market Value Calculation | Determines value based on current prices, affecting both loan amount and interest rate. |
Determination of Loan Amount
After the gold evaluation is complete, the NBFC calculates the loan amount that can be offered to the applicant. This amount is not solely based on the gold’s market value but also takes into consideration the loan-to-value (LTV) ratio.
The Reserve Bank of India (RBI) regulates the LTV ratio for gold loans.
LTV refers to the ratio of the loan amount to gold's market value. A higher LTV ratio enables you to receive a larger loan amount. However, it may increase the risk for the NBFC. To compensate for this added risk, some of the NBFCs may charge higher interest rates on loans with higher LTV ratios. Therefore, the LTV ratio is a significant factor in determining the interest rate.
- Higher LTV ratios (say 75%) mean more risk for the lender, so they charge a higher interest rate for the borrower.
- Lower LTVs (say up to 65%) represent low risk for the lender, so they offer a lower interest rate for the borrower.
Location and Customer Segment
- Interest rates may differ based on geographical location and customer profile.
- Special rates are available for certain locations or customer segments like women, businessmen, farmers, etc.
- This allows for the calibration of rates according to local market conditions and customer needs.
Promotional Offers and Deals
- Some NBFCs provide promotional offers and special deals to attract new customers with discounts on interest rates.
- Festive season deals, monsoon offers, special senior citizen rates, etc., may be available for limited periods.
- Existing loyal customers may also get additional rate benefits through retention offers.
- Such promotions allow NBFCs to compete and grow their gold loan portfolio.
RBI Guidelines
- As NBFCs are regulated by the RBI, the set interest rates should adhere to RBI's guidelines and directions.
- RBI may issue directives to restrict excessive rates or predatory lending practices.
- NBFCs must operate within the prescribed RBI regulatory framework.
Conclusion
Determining gold loan interest rates involves a complex interplay of multiple factors specific to the borrower, loan, market dynamics, and the NBFC’s own business considerations. With the right amount of research by the borrower, gold loans can serve as an economical financing option for diverse needs.
