Why gold prices matter for your gold loan

Gold loan interest rates in India range from 8% to 27% per annum, depending on the lender and your risk profile.

When you apply for a gold loan, the lender evaluates the purity and current market value of your gold.(Source: File)

Gold’s importance in India goes beyond being a precious metal. It also serves as a quick source of funds during emergencies, with jewellery or ornaments used as collateral. Many factors influence gold loans, but one often overlooked aspect is how closely gold prices affect your borrowing power.

Any change in price directly impacts the loan amount you can get, the interest you pay, and even the safety of your pledged gold. Let’s dive in to understand how these factors play such a crucial role in your gold loan journey.

Gold prices decide the value of your collateral

When you apply for a gold loan, the lender evaluates the purity and current market value of your gold. That is why prevailing gold prices are so critical. For instance, if 24-carat gold is priced at Rs 1,30,700 per 10 grams, 50 grams of gold would be worth ₹6.53 lakh. If prices were ₹1,10,000 per 10 grams, the same gold would fetch Rs 5.5 lakh.

Story continues below this ad

The higher the market price, the more valuable your collateral becomes, directly influencing how much you can borrow. Make sure to check current gold rates before applying for or renewing a gold loan.

Loan-to-value ratio and gold prices – How are they connected?

The Loan-to-Value (LTV) ratio determines how much of your gold’s value can be loaned to you. For small loans up to Rs 2.5 lakh, lenders can offer up to 85% of the gold’s value; for loans between Rs 2.5 lakh and ₹5 lakh, it is capped at 80%, and for larger loans, at 75%.

For example, if your gold is worth Rs 5 lakh and the LTV cap is 80%, the maximum loan you can get is Rs 4 lakh. If gold prices fall to Rs 4.5 lakh, your eligible loan drops to Rs 3.6 lakh. In other words, even if your gold quantity does not change, its market price determines how much you can safely borrow.

Gold prices and loan safety

Gold prices affect not only the borrowing amount but also the security of your loan. When prices rise, your pledged gold is worth more, reducing your risk. But if prices fall, your collateral value shrinks.

Story continues below this ad

For instance, if you pledge gold worth ₹6.5 lakh for a ₹5.2 lakh loan and gold prices drop by 15%, your gold’s value becomes ₹5.5 lakh, raising your LTV from 80% to nearly 95%. In such cases, the lender may require partial repayment or additional collateral. Keeping an
eye on price trends can help you stay prepared for such unexpected issues.

Interest rates and borrowing costs

Gold loan interest rates in India range from 8% to 27% per annum, depending on the lender and your risk profile. When gold prices are high, your collateral is stronger relative to your loan amount, which can help you negotiate better rates. For example, if your gold is worth Rs 6 lakh and you borrow Rs 4 lakh (LTV 67%), the lender’s risk is lower than for someone borrowing Rs 4.8 lakh (80% LTV). A lower LTV can result in better terms or faster approvals.

Key takeaways for borrowers

Gold loans are quick and convenient, but they carry risk. Prices can rise or fall. If they rise, you may borrow more or enjoy stronger collateral backing. If they fall, your loan balance may appear risky. To stay safe, avoid borrowing the maximum allowed and keep your loan below

75–80% of your gold’s value. Make repayments on time to reduce the risk of losing your gold in a market downturn. Track gold rates regularly.

Story continues below this ad

Gold prices determine how much you can borrow, the interest you pay, and the security of your loan. Whether you are taking a gold loan for short-term needs or as financial backup, understanding this link helps you make smarter borrowing decisions.

The author is a CEO of BankBazaar.com