Loans come in different forms. When in need of funds, borrowers can choose from a wide variety of loans to fulfill their immediate financial needs. Examples of loans include housing loans, personal loans, business loans, two-wheeler loans, etc. Among these options, a popular type of loan is a gold loan. Let’s understand the gold loan and its valuation in greater detail.
What is a gold loan?
In a normal loan, borrowers get the loan funds based on their income and credit history. In a gold loan, borrowers keep their gold as collateral with a lender and get a certain percentage of the gold’s value as a loan. They pay regular interest on their borrowing till the end of the loan term. Once the term ends, they get their collateral back. The gold given as collateral is stored in secured lockers. Shriram Finance also offers insurance on gold loans. In case of a rare event of theft, insurance will help borrowers get compensated for the value of their original gold.
Additionally, insurance is also provided to cover the death of the borrower. If the borrower dies, insurance cover ensures the borrower’s remaining gold loan is repaid, and the surviving family gets their original gold back. The process of gold loans is different from other types of loans. Gold loan valuation helps in determining the gold loan rate per gram, and eventually, the monthly EMI. Below is a detailed explanation of this process.
How Does Gold Loan Valuation Work?
Purity plays a huge role in determining the market value of gold. For example, the rate per 10 grams for 22-carat gold in the market will be higher than the rate per 10 grams of 18-carat gold. This difference in market rates influences the gold loan rate per gram.
| Purity of Gold | Past 30 days Average gold rate per gram | LTV (Maximum) | Gold Loan Rate Per Gram |
|---|---|---|---|
| 24 carat | 4,800 | 75% | 3,600 |
| 22 carat | 4,400 | 75% | 3,300 |
| 20 carat | 4,000 | 75% | 3,000 |
| 18 carat | 3,600 | 75% | 2,700 |
Here is an explanation of the terms used above:
Purity of Gold
Caratage helps in measuring the purity of the gold and the mixing of other metals. 24-carat gold is the purest form of gold and does not include any other metals. 18-carat gold has 18 parts of gold and 6 parts of other metals.
Average Gold Rate Per Gram
The average gold rate per gram represents the market value of the gold. This rate varies by purity. Since 24-carat gold is the purest, it is the most expensive. Lenders use the actual average price per gram of gold for the past 30 days for gold loan valuation.
Loan to Value
The loan-to-value (LTV) ratio is used for expressing the relationship between the loan to be given by lenders and the value of the appraised asset. An LTV of 75% would mean the lender would give up to 75% of the gold’s value as a loan.
Gold Loan Rate Per Gram
The gold loan rate per gram is calculated by using the average gold rate per gram and the loan-to-value ratio. For example, if the average gold rate per gram is 4,800 and the LTV is 75%, it will result in a gold loan rate per gram of 3,600 per gram (4,800 x 75%).
Here is an illustration of gold loan valuation in practice.
Example 1
Suppose if someone gives 10 grams of 20-carat of gold as collateral for taking a loan against jewelry. The market value of this gold is 40,000. The lender will independently verify the purity of the gold. Assuming the purity turns out to be 20-carat, and the lender applies an LTV of 75%. This will result in a gold loan rate per gram valuation of 3,000. So, for 10 grams of gold, the borrower will get a loan against ornaments of 30,000 (3,000 x 10).
Gold Loan EMI Calculator
The gold loan EMI calculator uses three variables for calculating the EMIs for loan against jewelry:
- Loan amount
- Interest rate
- Loan tenure (months)
At Shriram Finance, the interest rate for a loan against pledged jewels starts from 11.5%. The loan tenure can range from 12 months to 36 months.
Assume the loan above (30,000) is for 20 months and at an interest rate of 16%.
Using Shriram Finance’s gold loan calculator, we calculate the gold loan EMI for the above loan as follows:
Shriram Finance offers borrowers to choose from EMI and non-EMI options. If they opt for an EMI option, their monthly EMI for 12 months will be 2,722. This includes both principal and interest payments. At the end of the term, the loan of 30,000 will be fully paid along with interest. The borrower can collect the jewelry used as collateral for this loan at the end of the loan term. This option saves borrowers from repaying the entire principal amount upon the end of the loan tenure. Also, the overall interest outgo is low as it is calculated using the reducing balance method. As the principal reduces every month, borrowers pay less interest every month.
In a non-EMI scheme, the borrower pays only the interest amount of 221 per month. This amount is calculated by dividing the total interest payable suggested by the gold loan EMI calculator (2663) by 12. This method saves borrowers from the burden of paying principal every month. However, it is possible that the LTV could be lower for interest-only EMIs. Also, borrowers face the risk of paying a higher interest amount as these schemes do not reduce the balance of the original loan every month.
Example 2
The same principle applies across different caratage and LTV. For example, if someone gives 15 grams of 18-carat gold jewelry as collateral, and the lender uses a loan-to-value ratio of 65%. The loan against jewelry rate per gram valuation will work out to 2,340 (65% x 3,600). Using this gold loan valuation, the borrower will get a loan against ornaments of 35,100 (2,340 x 15). Let us assume the loan of 35,100 is for 6 months at an interest rate of 17%.
Using the gold loan EMI calculator, we get the following results.
Here also, the borrower can opt either for an EMI or a non-EMI option.
Shriram Finance – The Trusted Partner for Gold Loans
Shriram Finance is one of the country’s leading providers of loans against ornaments. By choosing Shriram Finance for gold loans, borrowers can be assured of a fair gold loan valuation and the best gold loan rate per gram.
Since 1986, Shriram Finance has offered multiple loan products, including a loan against pledged jewels. We have a wide network of more than 2,875+ branches all over the country. Over 40 lakh borrowers have placed their trust in Shriram Finance for the borrowing needs.
Know more about our gold loan offerings and to use our gold loan EMI calculator.
