How fluctuations in gold prices could affect gold loans

If you are in need of a loan, one of the options to get one in an easy way at a cheaper rate is opting for a secured loan against the gold lying idle at your home. A gold loan is not only cheaper than a personal loan, but you may also get it even if you have a low credit score.

“Gold loans are widely regarded as a hassle-free option for people seeking loans with low-interest rates, minimal paperwork and small ticket values. Moreover, the factors affecting the rates of gold loans are quite different from those at play in the case of other loans such as the purity of gold, the rate of gold at the time of getting the loan, etc,” said Rajesh Shet, Co-Founder and CEO, SahiBandhu.

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Shet describes the impact of fluctuations in gold rates on the gold loans:

Fluctuations while taking a loan

The biggest factor that can affect a gold loan is the loan-to-value (LTV), which is the ratio of the loan amount you can get to the value of the gold you pledge. When the price of gold rises, a greater amount is available to the borrowers and vice versa. Also, lenders often trace the fluctuations and prevalent gold price trends to determine the standard gold value for a smooth lending experience. The LTV is also calculated on the basis of the purity of gold pledged, which is in turn also a direct relation to the gold prices.

Fluctuations during an ongoing loan

Another way in which gold prices impact gold loans is the fluctuations running during an ongoing loan. In case the gold price trend undergoes fluctuations during an existing gold loan, the borrower may be asked by the lender to pay margin money on the existing loan amount. This can happen since the RBI has capped the LTV at a maximum of 75 per cent of the gold’s value, meaning that the lenders can only lend up to 75 per cent of the value of the gold pledged by the borrower.

Daily fluctuations

While the rate of gold fluctuates on a daily basis, it shouldn’t be a cause for concern for the borrowers since most leading gold loan providers don’t take these daily fluctuations into account while deciding on the interest rate. Only the prevalent gold rate trends are taken into consideration, wherein the chances of a sudden, massive price fluctuation and a resultant change in gold loan interest rates are negligible.

Also Read: Top 5 situations where a gold loan can help you

“Gold loans secure the interests of both the borrowers and lenders. For borrowers, their credit scores have little to no bearing on interest rates since at least 25 per cent of the gold value is kept as collateral. On the other hand, lenders are safeguarded from massive fluctuations in gold rates through a provision called Margin Call, wherein the difference amount can be requested from the borrower whenever the total outstanding of the loan reaches 85-90 per cent of the current metal value,” said Shet.