How Much Gold Is Required For Gold Loan?
Introduction
- What is a gold loan?
Gold loan is a collateral based loan, where the borrower gives their gold ornament/coins etc. as a collateral to the lender to secure a loan. Gold loans have been the most popular form of lending for decades, with lending participants in both unorganised as well as organised markets. These are fairly easy to avail, and comparatively low cost when compared to other loan offerings such as personal loans.
- Why understanding the gold quantity requirement is important
The amount of loan that one can avail using their gold as a collateral is dependent upon the market value of the gold. The gold’s market value is greatly influenced by its weight, and quality (purity). Hence, it is imperative to understand the gold quality requirement before one opts for a loan against gold, to be able to secure the maximum amount of loan against their gold and that too without hiccups.
- Brief overview of how gold loans are evaluated
As mentioned earlier, gold loans are lending products where the borrower keeps their gold as a collateral with the lender to secure the loan. This collateral is thoroughly evaluated by the lender to assess the quality and essentially be able to calculate the market value of the same, which helps in calculating how much loan can be given against the said collateral.
Unlike traditional loans, factors such as the borrower’s credit profile have a limited impact on the assessment. Rather the purity and weight of the gold is what has the biggest impact, because the collateral serves as a risk hedge for the lender. The lenders evaluate the gold based on the weight, and the purity of the gold i.e. if the gold is 22k, or 24k pure.
Factors That Determine How Much Gold Is Needed
- Loan Amount Needed
- Relationship between required loan amount and gold weight is one of the determinants of how much gold is required to fulfill the loan requirement of the borrower. A borrower can check the current per gram lending amount with the lender and accordingly deduce the weight of the gold collateral that they’d need to be able to avail the money required in the form of a gold loan.
- Gold Purity
- The purity (22K vs 18K vs 24K) affects valuation and eligibility of the borrower to avail a gold loan. A gold collateral of higher purity commands a higher market value, and thus qualifies for a high gold loan amount, and vice versa.
- Loan-to-Value (LTV) Ratio
- Loan-to-value in simple terms means the percentage value of loan that one can avail in proportion to the market price of the collateral. LTV is an important measure to determine the maximum possible loan that the lender would be willing to disburse. As per the Reserve Bank of India (RBI) guidelines, the maximum LTV for gold loans that the lenders can offer is 75%, i.e. 75% of the market value of the collateral can be given as a gold loan, and not more. It is important to remember the LTV rule while assessing the gold loan requirements against the collateral you have.
Estimating the Gold Required Based on Loan Amount
- Using Online Gold Loan Calculators
- The benefits of calculators provided by banks/NBFCs are unparalleled. It gives the users the convenience to take different scenarios or gold loan amount and repayment tenure into consideration, and assess the most suited option for them.
Minimum and Maximum Gold Requirements
- Minimum gold for gold loan accepted by lenders
- For gold loan minimum weight requirement may depend on the lender’s lending policy. Every lender may have different minimum weight requirements, it is recommended to check with the lenders before trying to avail a gold loan. Furthermore, a more prudent step would be to first assess the total loan requirement and then check if your gold would be eligible to get you the required loan amount. Typically starts from 5–10 grams (varies by lender).
- Maximum loan limits
- Some lenders may have a gold loan weight requirement or a cap on the gold loan amounts. However, this may be irrelevant if your gold loan requirement is low. It is recommended that you assess your loan requirement first, and then check with the lenders if they’d be willing to lend that amount and what is the minimum weight of gold they’d require as a collateral.
- How gold quantity impacts maximum eligible loan is that high quantity of gold translates into a higher value of the collateral, which enables the lenders to give a high amount as a gold loan. A borrower can always under-borrow compared to the quantity and purity of gold, but can never over-borrow.
Impact of Gold Type and Form
- Accepted forms: The lenders accept gold in various forms like Jewellery, coins, and bullion. An important point to note is that the amount of loan is not impacted based on the form of gold collateral, rather it only depends on the purity and quantity. The borrowers should also remember that in the case of jewellery, only the net weight of gold would be considered. i.e. any additional weight due to stones, diamonds, etc. in the jewellery will be not considered while assessing the value of the jewellery.
- Non-standard items (e.g., stone-studded jewellery) may reduce eligible value. In the sense that, only the net weight of gold in the jewellery is taken into consideration and not the gross weight of the jewellery.
- Only pledged gold is considered (not synthetic or gold-plated). This is because of the fact that gold’s value is the biggest determinant of the amount of loan you can avail. While gold plated jewellery does technically have some amount of gold, it doesn’t qualify as a gold jewellery.
Tips to Maximise Loan Amount with Less Gold
- Use high-purity gold (preferably 22K or 24K). This is one of the most famous tips to avail the highest amount of gold loan. High purity of gold collateral means that the gold can be sold for maximum value, which essentially covers the lender's risk more efficiently and allows them to give maximum loan. In short, you can avail a high gold loan based on purity.
- Choose lenders offering a higher gold loan LTV ratio. A high LTV ratio allows the borrower to avail maximum amount of loan in proportion to the value of the collateral. Comparing lenders LTV offers can help borrowers make a more efficient decision. indiagold offers LTV of up to 75%
- Maintain the gold in clean, untampered condition. Doing so will help the lender make the assessment quickly and will essentially enable the lender to also process and disburse the loan quickly.
- Approach banks with favorable valuation policies. As gold loan valuation policies can vary between different lenders, it is possible that different lenders value the gold differently which can have an impact on the total loan value.
