With gold loan you can fulfill your money requirements quickly and easily. You just have to provide your pure gold to the bank and certain documents. But the changes in gold prices have an effect on the borrowers and lenders. Let us study this impact in detail.
You must have seen the sudden fall in the gold prices. People rush to the gold jewelry shops to buy gold ornaments, coins and bars. There is an increase in demand in all forms of gold. In the period of fall in gold prices, the gold fund market also experience a similar kind of crowd of investors. But what about the gold loan market? If gold prices are falling, then what will be your next plan of action? Buy gold, purchase gold fund or avail gold loan? Well, it depends on your current situation.
Fundamentals for issuing gold loan
While studying the impact, we must first understand the parameters on which gold loan is issued. When an asset such as gold is pledged, the asset is valued at the current market price. This ratio on which the loan is given is known as loan to value ratio (LTV). Thus, when you approach an institution for availing gold loan, the loan is issued as per the existing market price of gold.
The institution decides to earn profit by charging interest from you. It makes an assumption that the gold prices will rise in future during the loan tenure. The value of gold will enhance in future. If you are not able to repay the gold loan amount, then the institution will sell the gold off and get its money back.
The exact implication of gold prices on gold loan
This ratio is calculated during the loan processing period. When the gold prices are higher, the institutions can provide higher loan amount. And when the gold prices state falling, the value of gold diminishes. Hence, in order to cope up with the margin and ratio, the bank or institution may ask for more gold as collateral.
We can observe that when the gold prices are considerably high, the gold loan institutions provide higher loan amounts to you. Moreover, they also earn good income as per their accounting books. But if the prices fall, then they have to reduce the loan amount. If you are already provided with higher loan amount and there has been drastic change fall in gold price, then it may ask for more collateral or gold.
As a loan applicant, you may get higher amount when the prices of gold are high. You must keep a track of the gold prices while applying for a gold loan. When the prices of gold fall down, then you may get comparatively less loan amount as per the ratio. It is always advisable to apply for gold loan when the prices of gold are higher.
Conclusively, the changes in gold prices have an impact on your gold loan amount. You need to be knowledgeable about the gold prices and must check whether sufficient gold loan is issued to you.
It is very essential to keep yourself up to date on a regular basis if you have a gold loan. Moreover managing it is not as easy as availing the loan. Everything has loop holes and in case of gold loan, the gold prices are the ones. If you have a gold loan, be cautious. The lender should not take you for a ride. Its your gold, its your money. Be very vigilant in keeping a track.
Gold loan is a good facility for everyone who requires urgent money. This facility can be of great use in the rural areas. However, as the article rightly suggests, before taking a gold loan, one must carefully study the gold market (consulting a professional is always safe). Always check whether you have received the correct amount which you require; also check if the institution is demanding the correct amount of gold as a mortgage. This point is important because the gold prices affect the loan given and the institution can demand more gold as a mortgage to make up for the fluctuation.
People need to understand the basics first. that a gold loan is only offered on the gold you keep to the bank or to the lender.When one is going to get a gold loan on the ornaments, the actually price of gold in the market at that time is also seen. It is important to keep a track view on the rates of gold also. Always try take loan from government banks only. Its safe and secure. Don’t get in any useless terms and conditions of agents. Always try to get in touch with the bank directly.
In case the value of the collateral i.e. Gold diminishes, the borrower is required to make up of the margin between the current value of the collateral and the loan value. In such a case, the borrower is required to pledge more collateral or pay cash, which may not be affordable for the borrower. So, gold price change surely has an impact on the loan taken.
Hey Ankita. Good article. About the gold loan, if I am pledging my ornaments to avail loan, than will the loan be disbursed based on weight only, or will it include the actual selling price of the ornaments (which might also include making charges)? Is the facility available on silver or precious stones to obtain loans? What is more preferable, taking a gold loan, selling gold bonds or going for a normal loan? What is the tenure for which the gold loan is given?