How can I get a Loan against Diamond Jewellery?

I. Introduction

• Brief overview of loans against diamond jewellery

Loan against diamond jewellery is a type of collateral based loan. In this type of loan, the borrower borrowing from a lender island pays interest on the borrowed amount as per the stipulated contract. However, to secure the loan, the borrower gives the custody of their diamond jewellery. This jewellery serves as a security or a hedge for the lender against the risk taken with lending to the borrower. Once the loan is repaid in full including the principal amount, applicable interest, and charges, and there is no outstanding amount left, the lender gives back the custody of the diamond jewellery to the erstwhile borrower.

• Connection to gold loans as another popular option for securing funds

Diamond backed loans are a derivative of the more popular forms of lending known as gold loans. These loans are no different than how diamond backed loans are described earlier, the only point of differentiation being that the borrower collateralizes gold based jewellery or utensils to secure a loan.

• Purpose of the article: Exploring both loan options and how they compare

The purpose of this article is to understand how to avail a loan using diamond jewellery, and is it really beneficial to opt for one instead of a gold loan.

II. What is a Loan Against Diamond Jewellery?

• Definition: A secured loan where diamond jewellery is used as collateral. How collateralization works is that the borrower gives the custody of their asset to the lenders. The lenders hold the asset to mitigate their risk exposure, as they reserve the right to liquidate the asset in an event of non-repayment or default by the borrower. Once the loan is repaid in full along with all the applicable fees, and interest, the asset’s custody is given back to the borrower.

• Types of Jewellery Accepted: Engagement rings, necklaces, bracelets, etc. Basically all the jewellery which have diamonds of good quality and sufficient weight.

• Loan-to-Value (LTV) Ratio: How lenders calculate the loan amount based on jewellery value. Lenders usually have a predetermined ceiling till which they can give out loans in proportion to the value of the collateral. For example in case of gold loans, the lenders usually have a ceiling of 75% LTV which means a maximum loan of 75% of value of gold can be availed from the lender.

III. What is a Gold Loan?

• Definition: A similar secured loan option where gold (coins, bars, jewellery) is pledged as collateral. This collateral serves as a hedge for the lenders to mitigate their risk exposure related to lending to the borrower. The lender reserves the right to liquidate the gold in case the borrower fails to repay or defaults on the loan.

• Popular in India and Other Markets: Gold loans are an extremely popular form of lending in India. One can find players in both formal as well as the informal sector. These loans are extremely easy to avail with no barriers apart from the availability of gold to pledge. It is quite common in countries with a high gold ownership culture as in such countries the borrowers often have sufficient collateral to pledge.

• Loan-to-Value (LTV) Ratio for Gold Loans: How much you can borrow based on the gold’s value is determined by the lender's LTV (Loan to value) ratio policy. The loan to value ratio (LTV) essentially means the maximum amount of loan that can be availed in proportion to the value of the gold collateral. For example- If the prevalent LTV ratio is 75% and the gold collateral is valued at INR 100,000 then the maximum loan that can be availed by collateralizing the gold collateral is INR 75,000.

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IV. Why Choose a Loan Against Diamond Jewellery or Gold?

• Quick Access to Cash: Secured loan against diamond jewellery as well as gold loans offer faster approval and funds than traditional loans. Lenders like indiagold offer quick loan processing and disbursal. Upon successful processing, the borrower can get disbursal in under 30 minutes! This can be really critical in cases where the borrower requires funds on an urgent basis to fund emergencies.

• No Credit Check: No credit requirement is one of the biggest benefits of loan against diamond as well as gold collateral. Both options are secured loans, so credit score is often not a factor. Since these loans are backed by collateral, the lender's risk is hedged as they can recover dues by liquidating the asset in case of a default. This makes credit score based assessment impractical, as the lender's risk exposure is already covered by the collateral.

• Retention of Ownership: In collateral backed loans the borrower retains the ownership to the collateral. Jewellery or gold is returned after repayment. This makes such loans a highly attractive option when compared to other sources of securing funding like selling off the jewellery.

• Loan Flexibility: Borrowers can choose the loan amount based on asset value. Although the maximum loan is capped based on the lender’s LTV criteria, there is no rule that the borrower has to take maximum available loans. A borrower can take a lesser loan amount against the same collateral.

V. How to Get a Loan Against Diamond Jewellery vs. Gold

• Step 1: Get a Professional Valuation

• For diamonds: Appraisers evaluate the jewellery’s cut, clarity, carat, and color.

• For gold: The weight, purity, and current market price of gold are assessed.

• Step 2: Find a Reputable Lender

• Banks, NBFCs, pawnshops for both types of loans.

• Step 3: Submit Documents

• ID proof, ownership proof, and valuation documents for both.

• Step 4: Loan Approval and Disbursement

• The process is typically quick and straightforward for both loan types.

VI. Key Considerations for Both Loan Types

• Interest Rates: Gold loans may have slightly lower rates than diamond jewellery loans. It is prudent to compare lenders, and the offering for both diamond and gold back loans, to come to a conclusion as to which loan suits your needs and requirements better.

• Repayment Flexibility: Flexible repayment schedules for both loan types. This factor too is highly dependent upon the lender, and any ongoing repayment scheme. Lenders like indiagold offer high flexibility to the borrowers, and offer really customer-centric features with their gold loan offerings.

• Risk of Default: Both loans carry the risk of losing the pledged asset if you default. The collateral backed loans are designed in such a way that in case the borrower defaults, then the lenders reserves the rights to liquidate the asset to recover any outstanding dues. This security hedge is one of the reasons why such loans are available at an attractive interest rate compared to traditional unsecured loans such as personal loans.

• Valuation Discrepancies: Different lenders may offer different loan amounts based on their valuations. Before finalizing the lender, it is recommended to check valuation with multiple lenders and choose the one who offers the highest valuation along with the highest LTV as the combination translates to a higher loan amount.

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VII. Pros and Cons of Loans Against Diamond Jewellery vs. Gold Loans

• Pros of Diamond Loans:

• Retain high-value jewellery. Diamonds are extremely expensive. And depending upon their size and shape, the stones can demand a premium in the market. Unlike gold where the underlying metal’s weight and purity determines the price, for diamonds, the rarity of shape, clarity, and size have a major impact on the market value, and certain rare diamonds trade at a huge premium compared to other diamonds of similar size.

• May be more suitable for high-value items. Since the diamonds are expensive, these loans are more suitable for high value items.

• Pros of Gold Loans:

• Gold commands a solid secondary market, high liquidity, and consistent price appreciation. It is widely available and popular among both lenders as well as the borrowers. Lenders of all sizes are present in the market in both unorganized sectors such as private money lenders, and jewelers; as well as organized sectors such as banks, and NBFCs.

• Typically lower interest rates. Gold loans attract a lower interest rate compared to some traditional forms of lending such as personal loans. This is due to the fact that these loans are backed by gold collateral, which decreases the risk exposure of the lender. This enables them to pass on the benefit to the borrowers in the form of lower interest rates. Lenders like indiagold offers highly cost effective gold loans starting at just 0.85%* per month!

• Cons of Diamond Loans:

• Higher interest rates than gold loans. This is very lender specific, however it is noted that gold loans available in the market are extremely cost efficient, with trusted lenders like indiagold providing gold loans starting at just 0.85%* per month! Which is extremely affordable when compared to other forms of lending.

• Limited availability compared to gold loan providers. The diamond backed loans lenders are very limited in numbers. Not all lenders offer these loans due to low demand for diamond in the secondary market, making it not an attractive collateral, as recovering dues can be a challenge for the lenders. Comparatively, gold loans are extremely easy to find in the market, with players such as local jewellers, banks, NBFCs all providing gold loans.

• Cons of Gold Loans:

• Loan amounts may be lower depending on the gold’s value. This is solely dependent upon the lender’s LTV policy, and underlying offers. Hence, to avoid this, it is essential to opt for lenders who offer a higher LTV on gold loans like indiagold.

• Can involve multiple rounds of assessment (purity, weight). This to ensure that the lenders are able to assess the gold collateral thoroughly and provide an accurate estimate on the prevailing market rate, which influences the amount of loan that can be availed.

VIII. Alternatives to Loans Against Diamond Jewellery and Gold

• Personal Loans: Unsecured loans as a feasible alternative. However, these loans come with its own sets of challenges when compared to gold and diamond backed collateral loans. For instance, personal loans are subjected to much more stringent credit checks, which increases the chance of application rejection, and also the assessment takes a longer time compared to the aforementioned loans.

• Selling Your Jewellery or Gold: If you don’t want to keep your items but need cash quickly, selling off your jewellery is one option, although it's not a preferred option, as it often leads to regret later. Availing a collateral backed loan can help service the obligations fairly quickly while retaining the ownership of the jewellery.

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