Understanding Loan-To-Value Ratio In Gold Loans: A Quick Guide

For the purpose of determining the loan amount, lenders will assess the value of the gold you pledge, primarily its purity and market value

To safeguard borrowers and lenders, the Reserve Bank of India (RBI) regulates the maximum LTV limit for gold loans

Source : PTI

Gold loans are a popular, quick, and convenient solution for urgent capital needs. This, to a large extent, has been due to the traditional popularity of gold among Indians, who can utilise it as collateral for a loan to take care of personal or business needs.

Among the many aspects of a gold loan that a borrower must know, is the Loan-to-Value (LTV) ratio, which determines the amount of loan you can get against your pledged gold. Let’s understand what LTV is and how it affects your loan eligibility.

What Is LTV Ratio?

The Loan-to-Value (LTV) ratio represents the percentage of your gold’s value that a lender is willing to offer as a loan. For instance, if a lender provides an LTV of 75 per cent and your pledged gold is valued at Rs 1 lakh, you can avail a loan of up to Rs 75,000. To safeguard borrowers and lenders, the Reserve Bank of India (RBI) regulates the maximum LTV limit for gold loans.

How Is The Value Of Gold Calculated?

For the purpose of determining the loan amount, lenders will assess the value of the gold you pledge, primarily its purity and market value. Here are some aspects that are examined. 

• Purity: Lenders evaluate the gold's karat value (typically 18K, 22K, or 24K). Higher purity can boost your loan value.
• Market price: The loan amount is also based on the average gold price over recent days, as per market trends.
• Net weight of gold: While checking, lenders only consider the pure gold content, in cases of jewellery. Stones, gems, and other embellishments that are part of the ornament are excluded from valuation.

Why Is The LTV Ratio Important?

Understanding the LTV ratio can give you a ballpark of your loan amount. For instance, you need a Rs 1 lakh loan but your gold is valued at Rs 80,000 (as per the LTV ratio). In this case, you may need to pledge more gold or reconsider your loan amount. The LTV ratio impacts the interest rate of the loan and lenders may offer varying rates based on risk—higher LTV loans (closer to 75 per cent) may come at higher rates as they pose a greater risk to lender.

Important Things To Consider 

The LTV ratio can fluctuate due to market conditions. If gold prices fall, your loan amount may be reduced. RBI may also revise the maximum LTV limit for gold loans based on economic factors. If you borrow the maximum loan amount (close to 75 per cent of the gold’s value), be mindful of repayments. If gold prices drop, the lender may request for additional collateral or partial repayment. Fail to comply with repayments and the lender could sell your gold to recover their dues. 

That’s why it is important to assess your needs and apply for only the amount you need. Opting for a lower loan amount can make repayment easier. Do check if the gold price trend to secure the best value on your loan. Understanding the LTV ratio can help with the borrowing process and prevent you from overextending financially.

(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)