How Is A Gold Loan Eligibility Amount Calculated?

The need for extra cash to make up for expenses beyond what one is earning ever month can arise due to various reasons. This can be either an emergency need such as urgent medical requirements or for other anticipated expense that is outside the scope of monthly income, such as contribution for a family wedding.

In an ideal situation, one should have some savings meant for such needs, but many times due to the state of household or personal circumstances one is not able to save enough. Thankfully, there are various means these days to finance the expenses. A short-term personal loan is available via multiple lenders. But the most prudent way to meet such expenses is to avail a gold loan.

Gold Loan

In simple terms, a gold loan is a form of a secured loan where one temporarily pledges a personal or family gold ornament with a lender and avail finance. This is one of the oldest forms of borrowing in India but has become more organised over time.

Nowadays, one can avail a gold loan without stepping out of the home and that too within an hour, as specialised lenders have improved their processes and finetuned the products to meet the customer’s needs. As a result, availing a gold loan is getting closer to become as easy as taking a swift unsecured personal loan.

But gold loans come with some added advantages. They are not dependent on one’s credit score, come with quick approval and with the most attractive interest rates compared to other forms of personal finance.

Gold Loan Eligibility and Gold Loan Amount

While a gold loan is the best form of short-term finance, the eligibility criteria are something that one needs to keep in mind. For instance, it is only advanced against gold ‘jewellery’, though gold coins issued by banks can be used to avail a loan too.

Moving forward, the gold loan amount is essentially dependent on the value of the yellow metal that is put up as a collateral. This in turn is dependent on two factors:

• Purity of gold
• Weight of gold

As a result, the gold loan eligibility per gram is an important factor to consider while planning to avail such a loan.

Most importantly, the other embellishments in a gold jewellery are discounted while arriving at a value of the gold. One may have a precious diamond with fine cuts in the ornament but the valuer only takes into account the value of gold in the jewellery.

This is because as against gold, precious stones do not have a standard value and are not readily monetised.

Moreover, the purity of the gold in the jewellery comes into play. Gold purity varies between 6 karat and 24 karat, though mostly in terms of jewellery it is in the range of 18-22 karat, with a higher karat representing a higher value. Gold loan eligibility is linked to the minimum purity of the yellow metal being 18 karat. Most lenders state upfront that the basic gold loan eligibility criteria are linked to having gold with purity of 18 karat or more.

The other underlying factor dictating the actual gold loan amount is the loan-to-value, or LTV, ratio. This represents a percentage of the value of gold in the gold jewellery. The monetary authority, the Reserve Bank of India in this case, prescribes an upper limit on the LTV ratio.

This helps a lender derisk the loan advanced as any sudden decline in price of gold could affect the value of the collateral and impact the amount that can be recovered in case of default. This ratio is currently at 75%. This means if the value of gold in the jewellery being pledged is Rs 1 lakh, the maximum gold loan amount one can avail is Rs 75,000. One can, however, avail a lower amount.

The price of gold fluctuates daily and as a result the gold loan eligibility is also dynamic. Gold loan eligibility per gram changes every time the price of the yellow metal changes.

Conclusion

A gold loan is considered the best way to raise resources for short-term needs. However, one needs to keep in mind the gold loan eligibility criteria. In particular, the purity of gold and the weight and as a result the gold loan eligibility per gram becomes an important factor as the gold loan amount is dependent on that.

IIFL Finance offers gold loans swiftly via an entirely digital gold loan process with clear gold loan eligibility criteria and flexible gold loan repayment options. The company, one of India’s biggest NBFCs, offers gold loans with an amount that starts at a low level and goes much higher depending on the value of the collateral.