How Gold rates impact gold loans?
A gold loan is one of the most preferred financial instruments available in the market today for people who need financial assistance.
Gold loans provide borrowers with a hassle-free option with low-interest rates, low ticket values, and minimal paperwork required to apply, so it’s not hard to understand why they are so popular among borrowers. Gold loans are popular in India, but people do not realize how important a factor current gold rates of the market are while calculating gold loans. As a gold loan is dependent entirely on the gold ornaments or jewelry that you are pledging, it is obvious that the current gold price trend will have a significant impact on the loan amount you can obtain.
The Loan-to-Value Ratio
RBI has capped the gold loan’s LTV (loan-to-value) at 75% of gold’s value, one of the biggest factors in its approval. LTV is essentially the ratio of the loan amount to the gold value. Gold loans are available to borrowers at higher interest rates as the gold price trend rises. The borrower, on the other hand, will have to pledge more gold in the event of a decline in the gold price.
Calculation of the standard loan value
When you take out a gold loan, gold price trends play an important role as lenders determine the standard gold value by tracing the fluctuations and gold price trends prevalent over one month. It is possible to factor in the predicted future trend for the gold rate in certain cases. Based on the purity of the gold pledged, the loan-to-value for the borrower is evaluated.
Trend fluctuations in gold price during ongoing loans
You should be aware that if the gold price trend in the future undergoes fluctuations during the term of your gold loan, the lender may also require a prepayment of the outstanding loan amount.
As experts explain, this is because lenders usually offer up to 75% of the total value of the gold that is pledged, and in the event of a decline in the value of gold, this amount can climb up to 80 to 85% of the gold’s value. As a result of this situation, many lenders are asking their borrowers to either pay the marginal difference or pledge more gold.
By not complying with these new requirements, a financial institution will view you as a defaulter, which will have a direct impact on your credit score.
Due to this, lenders, as well as borrowers, need to consider not only the current gold rate trend but also the potential future trends.
Investing in gold loans and the gold price trend in 2021
Most lenders have fixed the gold loan interest rate in 2021 within the range of 7.35% to 29% pa, with the upper limit being applied only in very rare cases, for loans ranging from Rs 1500 to Rs 1 crore (on average). Repayment tenures range from 7 days to 240 months. Comparison of gold loan interest rates can go a long way to helping borrowers find the best financial solution.
Even as quality-asset concerns affected many sectors in India, the popularity of gold loans has increased since June 2020. A sharp fall in gold prices and the return of the 75% LTV cap (which was increased to up to 90% in 2020 to help people meet their financial needs during the adverse circumstances caused by the COVID-19 pandemic) have led to a decline in gold loan applications in 2021.
The pledged gold must be at least 18 karat purity to be eligible for a loan, and any stones, jewels, or impurities are removed for evaluation, so people are opting to sell the gold instead of pledging it. The gold rate trend is one of the primary reasons why gold loan demand has increased. Recent price increases in gold have prompted borrowers to switch to gold loans as borrowers can now borrow more money based on the exact weight and quality of gold.
New Borrowers and the Impact
Likewise, a declining gold trend today would mean that borrowers applying for a loan will get a lower value for their gold than they would have gotten in the past, while a rising trend would mean the opposite.
Existing Borrowers and the Impact
The difference caused by the declining gold price trend will have to be made up if the LTV you obtained exceeds the current cap (75%).
While it is vital to compare gold loan interest rates before applying for a loan, you should also keep in mind the present as well as possible future gold rate trends.
As both organized and unorganized gold loan providers are expanding their reach in the digital gold loan market, it is a good environment for borrowers to obtain loans against gold. Likewise, when businesses close and many people lose their primary source of income without having a CIBIL score or credit history, they can easily get gold loans. Although if you are also in need of a gold loan then Rupeek can be the best option. They are providing instant gold loans with less documentation and also provide the gold loan calculator facility so that you can calculate the interest rates of the gold loan per gram for free and at the comfort of your home.