How To Get The Highest Value For Your Gold Pledge
I. Introduction
- Brief explanation of pledging gold for loan
Gold pledging is a process, where a borrower gives the custody of their gold to the lender in exchange for a loan. The gold acts as a security deposit which ensures that the lender’s capital is secured, as not paying back the loan entitles the lender to liquidate the gold and recover the dues. To put in simpler words, gold pledging is a process of risk mitigation for the lenders by legally taking the custody of gold until the loan is repaid in full, and then giving back the custody to the rightful owner.
- Why people pledge gold (emergency funds, business needs, etc.)
There may be various reasons why someone may choose to pledge their gold. These reasons may stem from an emergency to a well planned way of securing capital to enhance wealth. More generally, people pledge their gold to get quick access to loans. These funds may be used for a host of purposes like to fulfill an urgent cash commitment, fund bills for a medical emergency, or even to operate or expand business with the help of extra funds in the form of loans.
- Importance of getting maximum value
Getting maximum value is important from the borrower’s perspective. It allows them to ensure that they are not over collateralizing, i.e. giving higher value of gold as a collateral to secure a relatively smaller amount, which is not efficient. In gold loans, there is a concept called the Loan to value Ratio (LTV). This ratio determines the total amount that can be borrowed in relation to the value of the gold collateral. As per the guidelines set forth by the Reserve Bank of India (RBI), a maximum of 75% LTV can be given by the lenders. This means that for a gold collateral worth INR 100,000 a maximum loan of INR 75,000 can be given to the borrowers. Lenders like indiagold offer the highest LTV available in the gold loan space in India.
II. Understand the Basics of Gold Pledging
- What is gold pledging?
Gold pledging is a process in which the borrowers give the custody of their gold as a collateral to the lenders to secure a loan. This collateral serves as a safety net for the lenders that their lent amount is secure, i.e. in case of a default, the lender can liquidate the gold collateral to recover any outstanding dues.
- How lenders evaluate gold (purity, weight, market value)
Lenders evaluate gold collateral with an aim to understand the current market value of the collateral which is used as a measure to determine the maximum loan that can be given against the collateral. To evaluate the gold collateral, the lenders check the collateral on various parameters such as the purity of gold. This is done using methods such as testing using scientific methods, and checking for a hallmark certification, the lenders also check the weight of the collateral, net of any weight contributed by stones, or diamonds, to understand the weight of the gold metal alone, and lastly they check the current market rate of gold, to conclude the value of the collateral.
These tests may sound extensive and time consuming, but these are done fairly quickly within a matter of minutes by the lenders. Thai ensures a quick and smooth borrowing process by the borrowers. Lenders like indiagold offer extremely quick assessment and loan processing.
- Common types of gold loans providers (banks vs NBFCs vs pawnshops)
The gold loan market is an extremely competitive space. With participating lenders ranging from players in the organized sector like banks, NBFCs, to participants in the unorganized sector such as local money lenders, jewellers, etc. However, it is important to note that for the sake of security of the collateral and transparency, it is recommended to borrow from lenders in the organized space. Ew age lenders like indiagold offers highly attractive gold loan offering with rates starting as low as 0.85%* per month!
III. Factors Affecting Gold Loan Value
- Purity of gold (karats) – higher purity = higher value
Gold purity and loan amount goes hand in hand. One of the key factors affecting the value of the gold pledge is the purity of the gold collateral. Gold price in the global market is for its purest form, however since gold is a brittle metal, to provide strength and make it suitable for making it into usable form, a certain percentage of other metals such as copper is mixed, this dilutes the quality of the metal. Hence quality is a big determinant. Gold purity is measured in karats, with different quality levels denoted in different karat, i.e. 24 karat is the highest purity which means 99.99% pure gold, whereas 22 karat means gold with purity of 91.6%
- Current market rates – real-time gold price matters
If you’re looking for how to increase gold loan value, then tracking the current gold rates is a must! Lending is done on the basis of the underlying value of the gold. Hence, the rate as on the date of lending is instrumental in determining the value of the gold. Therefore, considering the current market rates is extremely important from both lender as well as the borrower’s perspective. As a borrower, it is important to know the current market rates, and negotiate well for the amount of loan.
- Type and form of gold (jewelry vs coins vs bars)
The type and form of the gold collateral also has an impact on the value of the gold. Although the form directly has little to no impact on the value, however different forms of collateral can signify different purity levels, example - A gold coin can have a purity of 99.99% whereas a gold chain may be 18 karat pure. Hence, the type and form of jewellery also impacts the value of the collateral. And these may be in many cases considered for gold loan for high-value gold items.
- Weight and deductions – deductions for stones, non-gold parts
Weight of the gold helps in determining the value of the collateral. In case of gold loan against gold jewelry, only the net weight of the gold in the collateral is considered while determining the value. Any weight increase resulting due to addition of stones, diamond, or any other stones will be deducted from the gross weight.
IV. Things to Compare Across Lenders
There are many lenders in the market. For choosing the right gold loan provider, one should compare the following factors across lenders to ensure that they’re able to avail the best and cheapest gold loan:
- Interest rates and processing fees : Interest rates and processing fees is one of the first things that one should consider and compare. By doing so, you can ensure that you’re able to secure the most affordable gold loan options which present the highest convenience and features to you.
- Loan-to-value (LTV) ratio – who offers the highest? : LTV essentially dictates the amount of loan that the lender would be willing to give for your gold collateral. Always choose the landers giving a high LTV ratio, and this should be one of the key factors that you should compare lenders on. Lenders like indiagold offers gold loan with a high LTV of up to 75%
Which is the maximum permissible LTV ratio as per the Reserve Bank of India (RBI) guidelines. - Reputation and transparency : It is important to compare lenders based on their reputation in the market, and the transparency that they offer. This helps in avoiding lenders that may pose a risk to your gold collateral. Reliable lenders like indiagold offering borrower centric features, and safety of gold with gold kept in secured lockers, and insurance cover on collateral should fare well on your assessment.
V. Maximize Your Loan Value
- Tips to get the best valuation:
- Use hallmarked gold : Gold with a hallmark sign implies the purity of the gold used to make the gold item. Hallmark is a standard by the Bureau of Indian Standards (BIS) and is extremely reliable to determine purity. Having a hallmarked jewellery can help a borrower get the actual loan value as per the real purity of their gold, i.e. maximum LTV that can be availed.
- Clean and present gold well : Gold loan is given for the net weight of the gold of the collateral. Giving a clean form of gold will help save some time in the assessment process, and ensure that there is no extra deduction citing round-off deduction in the weight citing visibly extreme amounts of dirt on the collateral.
- Choose the right time (high gold price) : Gold loan is provided based on the current gold price in the market. Choosing the right time, when the gold rate is at its highs can help in getting the best gold loan value.
- Opt for higher LTV lenders : LTV determines the ratio of loan that can be given to the borrower in relation to the value of the gold. To get the maximum loan, the borrowers can opt to go for lenders providing the highest Loan to value ratio (LTV) in the market. Like indiagold offers one the highest LTV among its peers. Making it essentially easier for the borrowers to boost the gold pledge value.
- Negotiate better terms (interest, repayment, tenure)
Negotiation with lenders can help you land a good deal for yourself. This is a practice that many borrowers should undertake to ensure that they are able to squeeze every-bit of value from the gold loan offered to them.
VI. Avoid Common Pitfalls
- Not checking multiple offers : Checking multiple offers from various lenders can help compare the available options and choose the most versatile lender which caters to the needs of the borrowers. There are various lenders like indiagold offering remarkable features such as high LTV, quick processing, low interest rates, no hidden charges, insurance for the collateralized gold, and much more!
- Ignoring hidden fees and charges : Hidden charges often go unaccounted while comparing lenders, and in many cases, these charges end up inflating the total cost of borrowing for the landers. Hence, it is imperative to read the loan document carefully and understand the charges associated with various scenarios, and make a decision of choosing lenders with this consideration into account.
- Failing to read the loan agreement : Loan agreements many times have unfavourable terms and conditions in the fine print, which can present as a con for the borrower. It is recommended to always read the terms and conditions carefully, and examine if there are any clauses which may be counterproductive, or unfavorable to you as a borrower.
- Missing repayment deadlines (risk of gold auction) : Repayment deadlines are extremely critical things to remember. Not complying with the repayment schedule may pose a risk of loss of gold. As the lenders reserve the right to liquidate the gold in case of default by the borrower to recover any outstanding dues.
VII. Additional Tips to Consider
- Use gold loan calculators : Gold loan calculators can help calculate the repayment amount, the cost of gold loan, and other factors that can help make a responsible borrowing decision, and save potentially big amounts.
- Consider short-term loans to reduce interest : Short term loans often come with lower interest rates. If you have a low requirement, and can afford to repay the loan amount in a shorter credit cycle, then it would be prudent to take short term loans to satisfy your borrowing needs.
- Understand your repayment capacity : Understanding one’s repayment capacity is the first step towards responsible borrowing. To do so, one should do a thorough analysis of the repayment of the gold, their income level, and the reserves that should be maintained to service the gold loan.
