How Gold Price Fluctuations Affect Your Gold Loan

The market rate of gold is one of the key factors that significantly impact gold loans. The fluctuations in the price of gold can affect several aspects of a gold loan, including interest rates, loan amounts, repayment terms, loan-to-value ratios, etc.

In India, gold has always been regarded as a symbol of wealth and prosperity. The intrinsic worth of this precious metal is also one of the reasons why it is considered to be an ideal choice for not just investment but collateralisation as well. The concept of gold loans or borrowing money against gold has been around for a long time, but it wasn’t until several NBFCs entered the organised gold loan market that the financial solution started gaining more traction as the NBFCs brought in high levels of transparency in the gold loan market.

Relationship between and Gold Prices and Your Gold Loan

Almost everyone knows that it is a good idea to check the gold rate today online before applying for a gold loan. Despite the popularity of gold loans in India, not many are aware of the importance of factoring the price trends of gold into their calculations. The eligibility for a gold loan depends majorly on the weight and purity of the gold being pledged, so it goes without saying that gold price fluctuations will also impact gold loans.

The Impact

Here is more information on how fluctuations in gold prices impact gold loans:

● Loan Amount

The loan-to-value (LTV) ratio for gold loans is one of the highest among different loan options and has been capped at 75% by the Reserve Bank of India (RBI). The LTV is calculated as a percentage of the current value of the gold being pledged as collateral for the gold loan. When the prices of gold rise, borrowers are eligible to borrow a higher amount of money against the same amount of gold. Similarly, if the gold rates fall, a borrower will have to pledge higher amounts of gold for borrowing the same amount of money.

● Standard Valuation of the Gold Loan

The price of golf also impacts how a borrower tends to avail of a gold loan. When a borrower applies for a gold loan, a standardised gold value is computed and set. This standard value is calculated based on the fluctuations and prevalent fold prices over a period of one month or more. In some cases, the predicted rate trends of gold are also factored in to calculate the standardised value of gold. The purity of the pledged gold is evaluated only after the standard value has been set.

● Gold Rate Fluctuations during Active Gold Loans

In cases where the gold rate falls significantly during an active loan tenure, some lending institutions may ask borrowers to make a prepayment towards the loan. Falling gold prices increase the LTV of the borrowed amount, which is not in a lender’s favour. In these situations, a lender may also ask the borrower to pledge more gold or to pay the marginal difference that has resulted through the gold price fluctuations. Failure to comply can lead to a borrower being considered as a defaulter, which also impacts their credit report negatively.

● Interest Cost

Gold prices also impact the rate of interest applicable on your gold loan. When the gold prices are high, the overall interest cost of the loan reduces. On the other hand, when gold rates are low, the interest cost increases.

There is no denying the fact that any changes in the market rate of gold have a profound impact on several aspects of gold loans, including the interest cost and loan amount.