The Relation Between Gold Price and Demand for Gold Loans

With the price of gold rising, people are turning to gold loans for financing. Read on to know the relation between gold price and demand for gold loan here!

20 Dec,2022 12:37 IST 1790 Views
The Relation Between Gold Price and Demand for Gold Loans

Gold has been a haven in India for years, and rightly so. People take pride in wearing it and seek help in times of need through a gold loan.

A gold loan is a funding avenue where gold acts as collateral. You can avail of a gold loan of up to 90% of the value of your pledged gold, as per the RBI rule. This loan is a prime choice, especially during a financial crisis. However, the loan amount depends on the gold prices and the possible amount a borrower can get.

Here’s all you need to know about the relationship between gold prices and demand for gold loans.

What Is The Relation Between The Gold Price And Demand For Gold Loans?

With the price of gold rising internationally, people are turning to gold loans as a viable source of financing as borrowers can get a more considerable loan for roughly the same quality and quantity of gold. Additionally, the Reserve Bank of India (RBI) has allowed banks to extend up to 90% of gold value.

The borrowers pledged gold determines the amount of the gold loan. The Loan to Value gold loan in NBFCs (non-bank financial institutions) can reach 75% of its value, in which case they can allow prepayment. Once the LTV reaches this level, the lender may approve an advance payment.

What Is The Role Of ‘Loan-to-value’ In Gold Loan Pricing?

The Loan-to-Value (LTV) ratio determines the amount of credit you can avail compared to the total value of your pledged gold assets. According to the RBI, the maximum acceptable LTV for gold loans is 90% of the gold value. For example, if a lender has an LTV ratio of 80% and the importance of pledged gold is INR 1,00,000, it is eligible for a credit of up to INR 80,000.

As the gold price increases in the market, the number of credits available increases at the same time. However, if the price of gold falls, you will need to pledge more gold assets to get the same amount of gold loan as before. Banks, financial institutions (FIs) and NBFCs use the loan-to-value ratio to determine the risk associated with gold loan agreements.

How Is A Gold Loan Amount Defined For A Borrower?

A gold loan credit amount highly depends on the quality and purity of your assets. Lenders usually prefer gold assets between 18-24 karats.

On the other hand, gold price fluctuations play an important role in calculating the baseline value of gold if you are a new borrower. As financial institutions track and analyse general gold price changes in the market. They usually consider the gold price change recorded over the past month or the current average market price.

Financial institutions sometimes use projections of future gold prices as parameters in their credit calculations. In such cases, the LTV ratio depends on the purity of the gold pledged to the lender. As a result, lenders now use professional credit scoring tools to verify gold purity.

Gold Price Fluctuations and Their Effect On Existing Gold Loans

The COVID-19 pandemic showed the most recent gold price fluctuation and loan demand. Gold prices had finally levelled after an initial surge in gold prices. As the price of gold falls, so will the amount you can borrow. In times of dip, borrowers may need to make a partial advance payment to their bank. It is only possible if the price of gold falls significantly. The most likely results are

1. Partial Advance Payment:

For demand loans, the lender can request partial advance payments at any time. It can happen if the LTV rises after gold price fluctuations.

2. Additional Collateral:

The lender may require other collateral from the borrower. It brings down the loan-to-value ratio to a reasonable level.

Bankers can use the previous month's data to determine the value of gold. You can analyse the moving average or the current price, whichever is lower. This process allows lenders to take necessary steps to respond to short-term changes in the gold price.

• Rising LTV indicates high risk for NBFCs and banks.
• The loan-to-value gold loan ratio is kept to a minimum.
• The gold loan price is 90% of the current gold price. Here banks can only allow short-term loans up to 80% or 85%.
• Based on his tenure, his LTV could be as low as 75% or less.

Avail Of A Gold Loan From IIFL Finance

IIFL Finance provides safe, quick, hassle-free and affordable gold finance rates. The gold loan process at IIFL Finance is swift, with minimal paperwork, instant transfers, competitive gold loan interest rates, and flexible repayment schedules.

Your gold asset is safe with us as we keep them under modern safety lockers and offer insurance coverage to the support. Avail of the benefits and apply for a gold loan with IIFL Finance today!

Frequently Asked Questions

Q.1: Are gold price and gold loan demand related?
Ans: The gold loan demand is likely to increase with the rise in gold prices because this will allow the borrower to avail of a higher credit amount with the same quality and quantity of the asset.

Q.2: What are the factors affecting gold prices?
Ans: Gold is a globally accepted metal and hence involves various factors.

• A rise or fall in currency value impacts gold prices.
• Global supply and demand for gold cause its price to change regularly. As demand for the yellow metal increases, so does its market price.
• As interest rates fall, demand for gold increases. Thus, people prefer to seek loans when gold finance rates are low.

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