Taking Loans Against Gold? Hike In Loan-To-Value Limit May Backfire For You

RBI has increased the loan-to-value (LTV) limit for gold loans by banks from the earlier 75 per cent to 90 per cent. If you are a borrower, this move can increase your eligibility for more loans against your precious metal, but if you are a lending bank, it may backfire. Many lenders say that there will be an overall increase in the quantum of gold loan diversion at their cost. The immediate impact is there will be an increase in delinquencies if gold prices decline suddenly. 

Now, you can approach a bank for taking gold loan of 90 per cent value of the gold from them (previously it was 75 per cent). “The limit of 90 per cent has been raised to that extent only because there were number of requests we have increased the LTV from 75 per cent to 90 per cent,” said Thomas John Muthoot, managing director at Muthoot FinCorp. The new policy will come into effect in July. 

If the price of loan against gold – popularly called gold mortgage loans-was to rise, the Reserve Bank of India (RBI) is set to raise the loan-to-value (LTV) limit, based on which gold loans are sanctioned. If set at 25 per cent, that would be a huge jump from the current 10 per cent, and could turn out to have been a blunder for those who took this route to raise money. For one, if prices fall drastically and the value of gold pledged with the bank falls below the minimum margin requirement (currently 10 per cent), then the bank will ask.

Interest rates on gold loans

Gold loans are used by people belonging to middle class who want short term finances. They use these loans as a source of funding for various purposes such as repayment of debt, medical expenses and renovation purposes. Gold loan interest rates can range from 7.50 per cent to 22 per cent depending on the nature of loan, ticket size and loan provider.” Gold-based loans are offered by a host of finance companies including banks, and NBFCs. If only a higher share of the advances are used to buy gold, these loans don’t seem attractive as on a net basis they may cost at least 2.50 per cent more than personal loans and 5.00 – 7.50 per cent more than term deposits. That said, gold loans can prove to be very useful when you need short-term funds or want to liquidate some existing gold jewellery holdings.

Gold loans at usurious interest rates saw some tightening in the year starting April, 2018. But, what was announced was not acted upon. Now, the government has proposed further hike to the limit on gold loan taken from regulated entities from existing 25 per cent to 50 per cent of the value of gold jewellery accepted as collateral. Gold continues to save the day for many households who are battling the daily grind in metro cities. When they need quick money, they pawn their possessions including gold, right? Well, not usually. It is either they take it on loan against gold or sell their entire stash at a nosedive price. Either way, by the end of the day, they get some much needed monetary relief from lenders.” Muthoot Fincorp Gold Loan Interest Calculator helps you know how much loan your jewelery can take. The approved loan value depends on the purity of your gold jewelery and the current gold prices adjusted to the ratio of the value of the loan. The higher the level of purity, the higher the loan value. 

Loan tenure, penalty on late or pre-payment 

Gold, in India has been traditionally considered as a prized asset and a hedge against the high inflation rates in the country. In this scenario, Gold loan in India also gained popularity of different kinds of customers such as professionals, traders and few others. However, it can be seen during the recent years that gold loans have taken new heights with more number of banks offering gold loans over and above the gold jewellery business. So, if LTV is capped at 80%, then the maximum loan amount that a consumer can take against his gold will be 80% of the current market value of his jewellery. This means that if you are taking a loan against a gold ring with an 80% LTV and it gets stolen or gets damaged, you will have to take back the same ring with you to repay the rest of your EMIs. In case you do not want to take back the ring, then your only option will be to take back another item equivalent to the lost one. Due to the hike in LTV limit, banks will be offering gold loans at a lower interest rate. Those who plan to take gold loans can wait and avail interest rate offers available for existing gold loan borrowers. According to experts, individuals should not take loans on their precious metal holdings since it can drag them into a debt trap if they return the metal leased.” 

Gold not accepted for loan

Lenders usually take a gold ring pledged by at least one male and one female. They also look for its hallmark, which is very important. If the quality of the ring is doubtful, the jeweller’s name should be printed in it. If the ring doesn’t have the jewellers name printed in it, then there’s no way to tell if it’s a genuine or a fake product.” Taking a gold loan is a safe investment, as it comes with fixed interest rates, quick processing time and flexible repayment options. Though gold loans have no collateral security like other kinds of loans, lenders take gold jewellery as collateral at the time of disbursement of loan amount.  

Loan against paper form of gold

Today, anyone can take a loan from a bank against holding gold in any form, particularly gold ETFs, mutual funds or gold bonds. The latter two can be used as collateral for short-term loans of upto 90% of the value of these instruments (through Overdraft or Term Loan). This facility makes it easier for investors to use gold as a source of regular income. On Tuesday, the RBI announced a hike of 50% in the LTV limits for gold loans taken by individuals. Individuals now can take an overdraft or term loan against their gold holding of up to 80% of the value of the gold held. Earlier, individuals were pegged at 60% LTV (loan-to-value) when taking a loan against their gold assets. If one takes a loan worth Rs 1 lakh against his gold holding, he can spend Rs 60,000 from it for any purpose after repaying the lender.  

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