How Do Fluctuations In Gold Prices Impact Your Gold Loan?

Ancestors believed that gold is a ‘trusted companion in misery.’ While you may find this notion odd, a solid perspective runs behind this age-old saying. Here, the older generation does not refer to the yellow metal that adds to your beauty when adorned as jewellery. Instead, they emphasise the investment value of gold.

Gold is a haven during financial crunches. You can sell your gold assets in the open market or secure a gold loan from a trusted financial institution. However, a few essential things can heavily impact your gold loan price, interest rate, loan tenure, and repayment schedule. One of these vital loan-determining factors is the fluctuations in the gold market price.

Role Of ‘Loan-to-Value’ In Gold Loan Price Fixation

The Loan-to-Value (LTV) ratio determines the loan amount you can avail of against the total value of the gold assets pledged by you. As per RBI, the permissible LTV for gold loans upto 75% of the gold’s worth. For instance, if the LTV ratio of a financial institution is 75% and your pledged gold is worth INR 1,00,000, you are eligible to seek a maximum grant of INR 75,000.

When gold prices rise in the market, the available loan amount surges simultaneously. However, when the gold price deflates, you have to pledge more gold assets to avail of the same amount of gold loan as before. Banks, financial institutions (FIs), and NBFCs use Loan-to-Value ratios to determine the risk involved in a gold loan agreement.

Evaluation Of Standard Gold Value For New Borrowers

A fluctuation in gold price plays a crucial role in calculating the standard gold value if you are a new borrower. Financial institutions track and analyse the gold rate changes prevailing in the market. They usually consider the gold price changes recorded in the past month or the current average market price.

Sometimes, FIs use predicted future gold prices as a parameter for the loan calculation. In such cases, the LTV ratio depends upon the purity of the gold you decide to pledge with the lender. Presently, lenders use professional loan evaluation tools to check gold purity.

Impact Of Gold Price Fluctuations On An Existing Loan

If you have an existing gold loan, lenders may ask you to deposit a pre-payment of the sanctioned loan amount. It reduces the risk borne by the gold loan providers.

Suppose the LTV chosen by your lender is 75%. In the case of a depreciating gold price trend, this loan amount will become 80% to 85% of the value. To resolve this, lenders ask you to pay the difference or pledge more assets to cover the gap.

Situations like these make tracking prevailing and predicted gold price trends for gold loan takers and lenders essential.

Get Your Gold Loan From IIFL Finance

With gold loans becoming popular, you can choose IIFL Finance to access safe, swift, and budget-friendly gold loans. The platform offers multiple benefits, such as minimum paperwork, instant transfer, low gold interest rate, and customised repayment schemes. IIFL keeps pledged gold in modern safety lockers and offers insurance coverage to the assets. Apply for an IIFL gold loan today!

FAQs:

Q1. What are the reasons for fluctuations in gold prices?
Ans. Gold has a dynamic price system that directly depends on various global parameters.
• Currency value: A rise and fall in the currency value significantly impact the gold price.
• Demand and supply of Gold: The global demand and supply of gold alter its price regularly. When the demand for yellow metal rises, it increases its market price simultaneously.
• Interest rate: The demand for gold surges when the interest rate falls. This is why people prefer to seek loans when the gold loan rate of interest is low.

Q2. What happens if I fail to repay my gold loan?
Ans. The lender has a right to auction your pledged gold after 90-days of the lapse of your loan tenure.