When applying for a gold loan, individuals must understand how lenders calculate the loan’s interest. Additionally, several factors contribute to determining gold loan interest rates, including the choice of lender, loan amount, repayment tenure, gold loan documents, and more. This article discusses such factors in detail and shares how borrowers can calculate their gold loan interest amount in a hassle-free manner.
How to calculate the interest on a gold loan?
There are 2 ways of calculating the interest and EMI on a gold loan:
- Using the mathematical formula
Gold loan EMI calculation can be done using the following mathematical formula:
EMI = P x R x [(1+R) N / (1+R) N -1]
Here,
- P = Principal amount (loan amount)
- R = Monthly interest rate, obtained by dividing the annual interest rate by 12
- N = Repayment tenure in months
However, human errors are often inevitable while performing complicated EMI calculations manually. Thus, in such instances, individuals end up with erroneous results.
- Using the gold loan calculator
To avoid errors and ensure 100% accuracy, individuals should use a gold loan EMI calculator to quickly and easily calculate interest amounts and payable EMIs.
A gold loan EMI calculator is a simple, free-to-use online tool that allows loan applicants to calculate their payable interest amount and EMIs. Borrowers need to enter the following data into the gold loan EMI calculator to find out their payable interest amount and EMIs:
- Principal amount or loan quantum
- Monthly rate of interest
- Repayment tenure in months
- Gold’s weight in grams
- Gold’s karat value
Gold loan EMI calculators instantly and precisely display the payable interest amount and EMIs upon entering the aforementioned data.
What are the different types of gold loan interest rates?
The type of interest rate one chooses to opt for has a significant bearing on their gold loan’s overall payable interest amount. Here are the 5 kinds of interest rates lenders can levy on gold loans:
- Fixed interest rates
Fixed rates of interest are determined during the loan application and remain constant.
- Floating interest rates
Variable or floating rates of interest vary according to market fluctuations and shifts.
- Compound interest rates
Lenders levy such interest rates every month upon the interest accumulated thus far.
- Jumping interest rates
These interest rates increase with each passing month, throughout the repayment tenure.
- Penal interest rates
Lenders impose penal rates of interest if borrowers default on their repayment tenure.
Thus, applicants should understand these interest rate types before opting for a gold loan.
What are the factors that affect gold loan interest rates?
Here are the 5 factors that affect gold loan interest rates:
- Loan quantum
The loan quantum determines the interest rates and the quantity of gold valuables borrowers need to pledge.
- A larger loan quantum yields higher interest rates.
- Smaller loan quantum yields lower interest rates.
Therefore, applicants should determine how much funds they need before availing of a loan. In addition, they should also keep their gold loan documents handy to make the loan application process seamless.
- Repayment tenure
Gold loan repayment tenures specify the duration of borrowers’ monthly repayment onus.
- A longer repayment tenure translates to lower interest rates.
- A shorter repayment tenure translates to higher interest rates.
Typically, gold loans have repayment tenures ranging from 1 week to 2-3 years.
- Benchmarking methods
Lending institutions typically use 2 kinds of benchmarking methods to determine gold loan interest rates:
- RLLR – Repo rate linked lending rate
- MCLR – Marginal cost of funds-based lending rate
Here is how often rates change depending on the type of benchmarking system:
- MCLR
Lenders following this benchmarking method update interest rates once every 6 or 12 months.
- RLLR
Lenders following this benchmarking method update interest rates once every 3 months.
When the RBI updates the repo rate, interest rates also follow suit.
- Lender’s particulars
The lending institution that a borrower chooses has a significant impact on the gold loan interest rates. NBFCs typically do not levy loan processing fees, whereas banks impose a processing fee of 1-2% of the loan amount.
- Borrower’s credit score
The applicant’s credit score affects their gold loan’s interest rates.
- Lower credit scores indicate a lack of trustworthiness, thus, yielding higher interest rates.
- Higher credit scores indicate that borrowers are reliable and creditworthy, thus, yielding lower interest rates.
Hence, borrowers should compare loan deals and offers across various lenders to choose the one that suits their needs the best. Furthermore, applicants should keep their gold loan documents handy to streamline their application procedure.
