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The demand for gold loans has been strong amid the covid-19 crisis. Many small business owners and families affected due to the pandemic resorted to gold loans as they are an easy form of credit. Lenders don’t evaluate the borrower’s credit profile and repayment capacity.

The interest on gold loans varies, ranging between 7% and 29%. Banks offer loans at lower interest rates than non-banking financial companies (NBFCs). For example, Punjab & Sind Bank offers gold loans at 7.00-7.50%, Canara Bank at 7.35% and Punjab National Bank at 8.75-9.00%, according to data from Paisabazaar.com.

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Among NBFCs, IIFL Finance offers gold loans at 9.24- 24.00%, Manappuram Finance at 12.00-29.00% and Muthoot Finance interest rates are up to 29%.

To understand how interest rates can impact your loan, let’s look at an example taking the lowest and the highest interest rate that IIFL Finance offers. A borrower takes a 2 lakh gold loan for one year. At 9.24% interest rate, the borrower will need to pay 10,151 as interest cost. However, at 24%, the interest outgo will be 26,943.

In gold loans, interest rates are an essential factor to consider as they vary widely. However, borrowers should look at other factors, too. For example, many lenders, like Punjab & Sind Bank, Canara Bank and Punjab National Bank, offer gold loans for up to one year.

IIFL Finance offers it for up to 11 months only, and Manappuram Finance is offering gold loans for up to three months under most of its schemes. The tenure of up to 365 days is available only in the Samadhan Plus scheme.

Some lenders, like Kotak Mahindra Bank and Bandhan Bank, offer gold loans for a tenure of up to four years and three years, respectively.

If you are looking for a gold loan for a longer tenure, lenders that offer lower interest rates won’t be of much help.

(Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts)

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