A gold loan is one of the most accessible secured credits available in today’s market. To avail this loan, all you need is authentic gold jewellery or coins, and your work is done instantly.
Whether you are covering healthcare, education or personal expenses, gold loans are always a convenient option. But there is a limit to how much you can borrow. Loan-to-Value ratio or LTV defines the amount you can take as loan from the financial institution or lenders. Let us understand this in detail in the upcoming section.
What Is Loan-to-Value (LTV)?
The loan-to-value is the percentage of a gold’s current market value that a lender is willing to offer as a loan. For instance, if your gold is worth 1 lakh and the LTV is 75%, the maximum Loan eligible for you is ₹75,000. The remaining 25% acts as the safety net of the lender in case you are unable to repay the loan or the gold prices fluctuate. LTV helps to balance the risk for both you and the lender.
How does LTV affect the Gold Loan Amount?
If the LTV is higher, you can receive more money for the same quantity of gold. At the same time, a lower LTV will receive less money compared to a higher LTV. So, if lenders are offering 75% and 65% each, the one with 75% LTV will offer a larger loan than the 65% LTV.
| Things to Know:
● Maximum regulated LTV in India The regulatory cap on the maximum LTV ratio for gold loans in India is 75% of the gold’s market value. This limit is fixed in order to reduce the risk of over-borrowing than what your gold can cover. ● Gold Quality The quality of your gold is measured in karats, which affects how much you can get at the same LTV. For example, if we take 22 karat gold and 18 karat gold, the 22 karat will be valued higher due to its purity, even if they weigh the same. |
Impact on Gold Loan Interest Rates
While LTV affects how much you can borrow, it can also influence gold loan interest rates in certain cases. Here’s how:
● Higher LTV = Slightly Higher Interest
Loans offered at a higher Loan-to-Value (LTV) ratio often come with slightly higher interest rates. This is because the lender is extending more money relative to the gold’s market value, increasing their exposure. To offset this additional risk, especially when the LTV is close to the regulatory ceiling (typically 75% for gold loans), lenders may charge a higher interest rate.
● Lower LTV = Better Terms
Lower LTV can come with perks. While opting for this LTV, lenders may offer lower interest rates or flexible repayment terms since the risk involved is lower.
Choosing the Right LTV: What Should You Consider?
Before you decide how much of your gold’s value to leverage, here are a few things to consider:
1. Immediate Financial Needs
If you require a larger amount urgently, a higher LTV can be helpful. But always balance this with your ability to repay, especially if the loan has a short tenure.
2. Gold Price Trends
Gold prices can fluctuate at any time. If they reduce sharply, and your Loan has a high LTV, lenders can demand more gold or repay early. In such cases, a conservative LTV or a lower LTV approach is considered a better alternative.
3. Repayment Flexibility
Evaluate your cash flow and accordingly decide whether you can repay the loan within the tenure. If not, go for a lower LTV with less interest or a smaller EMI.
4. Loan Tenure and Frequency of Interest Payouts
Some lenders may offer flexible interest payout options. It can be monthly, quarterly or at the end of the long term. If you are opting for high LTV, this flexibility can influence your repayment strategy.
Conclusion
The loan-value-ratio plays an important role in determining your principal gold loan amount. So, before you give your gold, take time to assess your financial needs and risk factors. Choose the right LTV to make your gold loan experience smooth, affordable, and stress-free.
