The relentless rise in the price of gold is grabbing headlines regularly. While the price of a 10-gram 24-carat gold bar is nearing the record level of Rs 76,000, it is carrying a different interpretation to those who want to pawn their gold for loans.
The rising price of the precious metal is ensuring that if a person puts gold, or gold jewellery as collateral, he/she will get more loan for the same amount than earlier. Let’s try to understand the process.
Implication of the LTV ratio
Loan-to-value is a key determinant of the loan that one can obtain from any bank or lending institution on offering gold bar/coin or jewellery as collateral. The loan-to-value ratio for gold now stands at 75%. This has been set by the Reserve Bank of India or RBI.
What it basically implies is that if a person offers gold as collateral, the maximum loan that any lending institution can offer against it is 75% of the value of the gold. Naturally, if the price of the metal increases, the amount of loan that any quantity of gold can secure automatically increases.
Ratio raised during Covid 19
It should be mentioned here that during the Covid 19 pandemic, the RBI raised the LTV ratio for gold to 90% in order to help the vast number of people who had to income and had to fall back on pawning their gold to survive. However, after the retreat of Covid 19 pandemic, the RBI restored the ratio to 75%.
However, that does not mean that you can rush to your nearest bank of lending institution to pawn gold. You must scour the market for the interest rates and prepayment terms. Once you get comparative rates of several institutions, can you go ahead.
Prices might crawl higher
There is wide speculation that the price of gold will inch closer to Rs 80,000 this year due a several factors such as reduction in policy rates by different central banks of the world, weakening dollar, continuing tension in West Asia and Ukraine-Russia front as well as the uncertainty of the US presidential elections. If it does, gold will help its owner extract more value as loans.
Gold loans depend on LTV, loan-to-value ratio, and if the value rises, so does the loan amount. Gold prices have been rising. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
