What Are The Factors Influencing The Gold Valuation For Gold Loans?

It is not unusual today to be in a position where you have an urgent expenditure to meet without having the funds to do so. This could be for medical expenses, relocation, children’s admission or tuition fees or a host of other reasons. Many of us look at loan financing options at this time. One of these options is Gold Loan Finance or Loans against Gold which offer two major advantages. Being a secured loan, interest rates are lower than unsecured loans. In addition, you can avail a gold loan no matter what your CIBIL score. Gold Loan Finance is offered online by several banks and NBFCs such as IIFL as well. They are sometimes referred to as Digital Gold Loans. In this blog we explain the factors that influence the valuation of your gold while taking gold loans.

One of the primary factors affecting the valuation of gold deposited against a gold loan is the weight of the gold deposited. If you are depositing jewellery, the cost of the jewellery includes a making charge apart from the value of the physical gold. This charge increases with the intricacy and originality of the design. The gold valuation only takes into account the weight of the gold, not the making charge.

Another key factor that is taken into account during valuation of gold deposited against gold loan finance is the purity of gold. This is measured in karats or carats. The purest form is 24 karats or 24K and is the most valuable. 18K gold has a 75% level of purity. 24K gold is usually about 9% to 10% more valuable than 22K gold. Most gold jewellery is of 18K to 22K purity as 24K gold easily scratches and is not ideal for setting of precious stones.

The third factor affecting the valuation of the gold deposited to avail a gold loan is the prevailing price of gold in the market. Gold prices fluctuate on a daily basis. There are several factors affecting the price of gold in the market. While demand and supply play a significant role, other factors also affect the price of gold. These include inflation, government policies, import and export duties, the state of the national economy, international markets and the global economy, as well as prevailing interest rates. Gold prices tend to go up during times of financial instability in the national and international markets as gold is considered a relatively stable and safe investment option. Similarly, when interest rates offered on bank deposits decrease, gold rates tend to increase, as more people prefer to invest in gold over bank deposits at that point of time.

Another factor that affects the valuation of the loan given against gold is the Loan to Value (LTV) Ratio. This is the ratio of the value of the loan to the value of the gold deposited against the loan. Most lenders offer a gold LTV ratio of 70% to 75%. This is in line with the RBI norms where the maximum gold LTV ratio permitted is 75%. Lenders do not provide 100% of the value of gold as loan as they need to protect themselves against risk. For e.g., if the lender had offered you an LTV of 100% and if by some misfortune you were not able to repay the gold loan, and gold prices dropped, the lender would not be able to recover the loan amount by auctioning the gold. If you recollect, gold prices declined by more than forty-five per cent between 2011 and 2015. Lenders therefore try to keep an LTV value such that they can protect themselves from such risks.

Taking a loan against gold is a good option today if you are facing a financial crunch. Gold prices are on a roll. The price of 24K gold breached the INR 60,000 mark in June 2023 and was almost double what they were five years back. Since it is a secured loan, the interest rates are comparatively lower than that of unsecured personal loans as well. However, you need to keep in mind that the valuation of a gold loan, whether applying for an online gold loan or visiting a lender personally, will vary from lender to lender and is dependent on four main factors. These include the weight of gold deposited, the purity of gold – whether 14 K or 24 K etc., the prevailing price of gold in the market and the Gold LTV Ratio set by the lender. It is a good practice to compare the terms and conditions and valuation offered by various lenders before deciding where to avail the gold loan from. You could also use an online gold loan calculator available on the IIFL website to get an estimate of the loan valuation before you approach a lender or apply for a digital gold loan.