Presenting a hassle-free option for people with low interest rates, small ticket values, and minimal paperwork involved in the application process, it isn’t hard to see why gold loans are so popular among borrowers. Even despite the popularity of gold loans in India, people do not realize the importance of factoring gold price trends into their calculations for the same. As a gold loan is completely dependent on the gold ornaments or jewellery that you will be pledging, it goes without saying that the current gold price trend will have quite an impact on the loan and loan amount you will be able to avail.
THE LOAN-TO-VALUE
One of the biggest factors that affect your gold loan is the LTV (loan-to-value), which has been capped at a maximum of 75% of the gold’s value by the RBI. The LTV is basically the ratio of the loan amount you can get to the value of the gold you pledge. It goes without saying that when the gold price trend rises, the amount available to the borrower as a gold loan will also increase. On the other hand, borrowers are required to pledge more gold to avail the same amount as a loan in the scenario where gold price trends show a decline in price.
CALCULATING THE STANDARD LOAN VALUE
Gold price trends play a major role in how you avail a gold loan as for new borrowers, lenders calculate the standard gold value by tracing the fluctuations and gold price trends prevalent over a period of one month. In some cases, the predicted future trend for the gold rate may also be taken into account. The loan to value for the borrower is then evaluated, based on the purity of the gold that is being pledged.
GOLD PRICE TREND FLUCTUATIONS DURING AN ONGOING LOAN
An important thing that gold loan applicants should be aware of is the fact that if the gold price trend in the future undergoes fluctuations during your existing gold loan, in some cases, lenders may also ask for a prepayment of the existing loan amount.
According to experts, this is because lenders usually offer up to 75% of the total value of the gold that is pledged, and in case the prices of the gold trend towards a decline in value, this amount can become 80 to 85% of the gold’s value. This situation does not pan out to be favourable for lenders, which is why many tend to ask their borrowers to either pay the marginal difference that has been created or to pledge more gold.
Not complying with these newly generated requirements makes a financial institution consider the borrower as a defaulter, which of course, has a direct impact on your credit score as well.
That is why considering not only the prevalent trends but also the possible future gold rate trend becomes very important for lenders as well as borrowers.
THE GOLD PRICE TREND IN 2022 AND ITS IMPACT ON GOLD LOANS
In 2022, the gold loan interest rate has been fixed by most lenders within a 7.35% to 29% pa range, with the higher limit being applied only in very rare cases, for loans ranging from Rs 1500 to Rs 1 crore (on average), and repayment tenures of 7 days to 240 months. As always, a gold loan interest rate comparison can go a long way in helping borrowers find the perfect financial solution for their needs.
Even as many sectors in India suffered due to quality-asset concerns, the popularity of gold loans has been on a rise since June 2021. In 2022, however, a sharp fall in prices and a return to the aforementioned 75% LTV cap (which was increased to up to 90% in 2021 to help people meet their financial needs during the adverse situations caused by the COVID-19 pandemic) has led to a decline in the number of people opting for gold loans.
A minimum of 18-karat purity for the pledged gold is required for availing the loan and other stones, jewels, or impurities are removed from the gold for evaluation, which has made selling an option that an increasing number of people are choosing.
What’s been the impact on the gold price?
This vast amount of liquidity at some point will point towards inflation, which we in effect are already witnessing by falling and negative bond yields in various European countries, and stock market optimism despite the fragile underlying sentiment.
Therefore, in the face of all this adversity, it was expected the gold price would perform well to-date, which it has, rising by 19 percent on an intra-year basis. Compared with some other asset classes more profoundly anchored to the macroeconomic tides, that is a very decent performance.
Yes, pain will be felt but not to an extent that will send significant shockwaves throughout the international markets. After all, not all sectors are equally affected by the current sentiment and an awful lot of support has been provided by governments across the globe.
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