Gold Prices Are Shining: Why Rising Bullion Is Positive For Gold Loans?

A gold loan is a secured form of debt wherein the borrower pledges gold jewellery as security in exchange for cash. The lender keeps the jewellery as collateral for loans. The jewellery is given back to the borrower once the money has been repaid.

The loan amount that will be disbursed depends heavily on the value of the gold jewellery. The appraisal of the gold ornaments is performed by a professional chosen by the lender, who takes into account the jewellery's weight and the purity of the yellow metal. The valuer disregards the weight of other precious stones because there is no standard price or comparison point for them.

Lenders use gold loan per gram or gold loan rate per gram to calculate and represent the loan amount one can get for every 1 gram of pledged gold.

India’s central bank and regulatory authority Reserve Bank of India has established guidelines for gold lending. The loan-to-value (LTV) ratio which all lenders must lend at for gold loans, has been fixed by the Reserve Bank of India at 75%. As a result, the majority of lenders provide loans for up to 75% of the market value of the gold that is pledged.

Gold Weight:

Gold loans are offered against only the value of ‘gold’ in the jewellery after deducting the weight of any stones or other embellishments as they don’t have a standard value benchmark. Therefore, even if one has a small diamond stud in the gold jewellery pledged, the lender does not take the value of that precious stone into account while processing the loan. The additional parts of the jewellery do not increase the gold loan per gram rate or the approved amount on the gold loan.

Purity Of Gold:

Gold purity is indicated by the karat scale and any financier who offers a gold loan will first examine the gold’s purity and quality before processing the loan. Gold ornaments are typically between 18 Karat and 22 Karat in purity, wherein a loan secured by 22 karat gold will be worth more than one secured by 18K or 18 Karat gold.

Changes In The Market Price Of Gold:

The value of the gold loan that will be disbursed is determined by the current gold market price. As a result, if the price of gold has decreased, the amount of the sanctioned gold loan will be reduced.

How Gold Loans Gain From The Rising Bullion

Gold prices fluctuate on a regular basis and depend on several factors such as geopolitical tensions, the value of the rupee against the dollar, demand and supply. Therefore, one must check the price of gold before seeking a gold loan to ensure they get the best value for their asset.

The price of gold has been on the rise in recent times crossing record highs of over Rs 60,000 for 10 grams of 24k gold (99.9%), and this is a positive for gold loan financiers. This is mostly because when the price of gold increases, it makes the jewellery or ornament more valuable. Therefore, when they think their gold will fetch a better value they are more inclined to opt for a gold loan.

Thereby it is more of a win-win situation for both the lender and the borrower, as it means better loan value for the borrower who can get more money for the same amount of gold, and for the gold financiers it means a growth in the loan books.

An increase in gold prices may also help gold financiers become more profitable. This is due to the fact that gold loans often have higher interest rates than other types of loans. Therefore, the profitability of gold financiers may rise along with the expansion in loan volume.

Conclusion

The final amount of the gold loan to be disbursed is determined by a variety of variables, the most important being the prevailing market rate of gold, along with the quality of the gold used as collateral.

As the rate of gold is dynamic, the same lender may charge offer a different value for the gold asset for the same weight of gold jewellery pledged as a security. Therefore, the rise in the rate of gold has emerged as a boon for the gold loan market, as it gives the borrower more value for the gold asset, while the gold financier gains from the increase in the demand for gold loans.

While there is a wide unregulated market out there, comprising small local lenders and pawn shops, it is advisable to take a gold loan from a reputable lender like IIFL Finance, as they offer a hassle- free process, with attractive interest rates and at a very nominal cost.