Understanding Gold Loan Valuation
Gold loans are a popular form of secured credit in India, but borrowers often wonder why the loan amount per gram varies with gold purity. The answer lies in how lenders assess the value of the gold pledged as collateral. Purity, measured in karats, directly influences the percentage of pure gold in the ornament, which in turn determines the loan amount.
Role of Gold Purity in Loan Amount
Gold purity is expressed in karats (K), with 24K being the purest (99.9% gold). However, most jewellery is made of 22K (91.6% pure) or 18K (75% pure) gold because pure gold is too soft for intricate designs. Lenders calculate the loan amount based on the weight of pure gold content after deducting impurities and making charges. For instance, 10 grams of 22K gold contains 9.16 grams of pure gold, while 10 grams of 18K gold contains only 7.5 grams. Therefore, for the same gross weight, higher purity gold yields a higher loan amount.
Market Rate and LTV Ratio
Apart from purity, the prevailing market price of gold and the lender's loan-to-value (LTV) ratio play crucial roles. The Reserve Bank of India (RBI) allows banks and NBFCs to offer up to 75% of the gold's value as a loan. The gold value is calculated as: (weight of pure gold) x (current market rate of 24K gold). For example, if 24K gold is ₹5,000 per gram, then 22K gold (with 91.6% purity) would be valued at ₹4,580 per gram, and the maximum loan at 75% LTV would be ₹3,435 per gram. In contrast, 18K gold (75% pure) would be valued at ₹3,750 per gram, with a maximum loan of ₹2,812.5 per gram. This explains why the loan amount per gram varies with purity.
Lender Policies and Deductions
Different lenders follow different valuation methods. Some may deduct making charges, wastage, or stones from the gross weight before calculating pure gold content. Others may use a lower LTV ratio for lower purity gold. Additionally, the loan amount can vary based on the lender's internal policies, location, and competition. It is advisable to compare offers from multiple banks and gold loan NBFCs to get the best value for your gold.
Why You Should Know Your Gold's Purity
Before pledging gold, get it tested at a certified hallmarking centre to know its exact purity. Hallmarked jewellery carries a mark indicating karatage, making it easier for lenders to assess. Remember, the loan amount per gram is not fixed; it fluctuates with gold prices and lender terms. By understanding these factors, you can maximize the loan amount while ensuring transparency.
