How to Calculate Interest on a Gold Loan

When we take a loan at a jewel auction, the lender levies an interest rate you have to pay monthly over and above the principal amount. Called loan repayment, the interest rate payments create a financial obligation on the borrower to avoid defaulting on payments.

But what if the gold loan interest rate is higher than the borrower can afford? Since defaulting on interest payments negatively affects the credit score, it is important to take a gold loan with an affordable interest rate. Hence, it becomes critical that you calculate the interest on a gold loan even before taking the gold loan.

Things you need to know about gold loans:

The loan amount is:

One of the most important factors in calculating the gold loan interest rate is the loan amount you want to get from the lender. Technically, the loan amount determines how much Gold you have to pledge and the interest on the loan. The higher the loan amount, the higher the interest rate, depending on the chosen loan tenure.

• The Type Of Interest Rate:

Borrowers always think that only one type of interest remains fixed every month. However, lenders may charge other types of interest on their gold loans. For example, the borrower may charge compound interest (charged on accrued interest), jumping interest (increases every month), EMI (interest on a portion of the principal amount), or penal interest (charged if you have not closed your loan account after maturity). Hence, it is important to know the type of interest beforehand.

• The loan tenure:

Loan tenure is a vital factor in calculating the gold loan rate of interest. The loan tenure specifies the period of your monthly loan repayment obligations. If everything remains the same, the higher the loan tenure, the lower the interest rates will be, as you will have more time to repay the gold loan. Hence, it would be best to consider the loan tenure while calculating the gold loan interest rate.

• The Financial Entity:

The interest rates are highly influenced by the charges levied by the financial entity from which the gold loan is taken. For example, the interest rates are generally higher if the entity has other fees attached to its gold loan. Banks impose a processing or valuation fee of 1-2%, while most NBFCs do not levy such fees. Therefore, the costs and charges are also a factor to consider while calculating the interest rate on gold loans.

• Loan calculators:

Most people do not know about loan calculators that can provide an effective means to calculate gold loan interest rates. Loan calculators are online tools that allow the borrower to calculate interest rates based on selected factors such as loan amount, gold value, and loan tenure. If you already know the quantitative value of such factors, you can use a loan calculator to calculate the interest rate on the gold loan accurately.

Jewel Auction Process:

The gold loan auction process involves the realization of the value of gold pledged by the defaulting borrowers after providing adequate prior notice if the borrower(s) have defaulted in payment of their outstanding loan amount in the following scenarios:

• As per the loan repayment schedule or due to failure in providing the margin money, as per the terms of the gold loan and as requested by the company-Bajaj Finance Limited; or
• In case of downward fluctuations in the rate of gold fixed by the company at the time of the gold loan application.

Gold loan tenure can vary from one financial institution to another, with a minimum tenor starting at 6 months with many lenders. Bajaj Finserv offers gold loans at a fixed tenure of 12 months, providing sufficient repayment flexibility per the borrower's affordability.

It is important to take a jewel loan interest rate with an affordable interest rate. Hence, it becomes critical that you calculate the interest on a gold loan even before taking the gold loan.