Gold loans have become an increasingly popular way for individuals to access quick funds in times of financial need. With gold prices high, lending institutions are more than happy to advance a loan against your gold jewellery. However, interest rates on gold loans can vary significantly across financial institutions. The good news is there are several things you can do to improve your chances of getting approved for low-interest gold loans.
Understanding Gold Loan Rates: How They Are Set
Before looking at ways to obtain low-interest gold loans, it’s helpful to understand the key factors that influence the interest rates on such loans:
- Loan to Value (LTV) Ratio: The maximum permissible LTV as per the Reserve Bank of India (RBI) for gold loans is 75%. The higher the LTV ratio, the higher the interest rate can be since the lender is at greater risk. Opting for a lower LTV of close to 60% can help reduce the rate.
- Quantity and Quality of Gold: Interest rates are higher for those pledging low-carat gold or very low quantities. Rates reduce as quantity and purity increase.
- Loan Tenure: Short-duration loans of under 12 months may attract lower interest rates compared to long duration loans exceeding 3 years. Opt for shorter tenures to get lower rates.
- Loan Provider: Different financial institutions have varying policies and interest rate models. Compare rates across lenders to get the lowest interest rate.
Low-Interest Gold Loan Tips
With these factors in mind, here are some low-interest gold loan tips that can help you get approved for a gold loan at better rates:
1. Opt for a Short Tenure Loan
One of the easiest ways to get a lower interest rate is to opt for a short-duration loan. Most lenders charge higher rates for long-tenure loans that exceed 2 or 3 years. Stick to a tenure of 12 months or less to automatically qualify for their lowest rates. This may require you to make higher monthly repayments, but the overall interest outgo is lower.
2. Provide Maximum Gold as Collateral
Financial institutions provide lower interest rates when you pledge higher gold quantities as it lowers their risk. Evaluate all your gold jewellery and pledge the maximum quantity acceptable to the loan provider to reduce your interest rate. Also, segregate 24-carat gold from 18-carat and 22-carat jewellery as superior gold purity fetches better rates.
3. Avoid Very High LTV Ratio
Submitting jewellery worth significantly higher than the loan amount may seem attractive, but very high LTV ratios are tied to higher interest rates. Opt for an LTV ratio in the 60% to 75% range to qualify for low-interest gold loans.
4. Evaluate Different Lenders
Interest rates and eligibility criteria can vary widely across gold loan providers like banks, Non-banking Financial Companies (NBFCs) and dedicated lending institutions. Spend time researching the major low-interest gold loan companies in your city or region and evaluate their interest rates and terms to identify the lender offering the lowest interest rate for your targeted loan amount and tenure.
5. Build Relationships with Lenders
If you have an existing relationship with the financial institution where you hold savings accounts or fixed deposits, check if they offer gold loans. Your loyalty and good financial record may make them more willing to offer attractive interest rates to you. Having accounts with multiple financial institutions can provide you leverage to negotiate interest rates.
6. Add a Co-applicant
Some loan providers are willing to offer lower rates if a co-applicant who is financially sound is added to the gold loan application. If the co-applicant has a strong credit score and a healthy income, it improves the combined eligibility and can help you negotiate a lower interest rate on your gold loan.
7. Avoid Prepayment and Foreclosure
Many financial institutions charge heavy penalties if you foreclose low-interest gold loans or make prepayments to close the loan before the tenure ends. To avoid getting hit by steep penalty costs, plan your finances carefully and apply for a tenure that you are reasonably confident you can adhere to without the need for foreclosure. This will ensure the rate you are approved for holds true for the entire tenure.
Conclusion
By following these handy tips, being organised with your paperwork, researching lenders thoroughly and fine-tuning your loan application, you can significantly improve your chances of getting approved for low-interest gold loans relative to standard rates, thereby easing the pressure on your finances.
