Indian households collectively hold a significant amount of gold, often passed down through generations. This precious metal, mostly in the form of intricate bridal jewels, rarely loses its value and has always been a symbol of wealth, tradition, and cultural significance. Besides cultural affinity, these jewels are also used as a most convenient way to secure funds in times of financial need. 

However, there are several factors that one should consider before applying for a gold loan. 

How These Loans Work

Gold loans are suitable for those who want to tap into its financial power without selling it. Gold can be readily used as collateral for a loan, whether it's stored in a bank locker or at home. 

The loan is secured by pledging the jewels as collateral. Factors such as gold purity, weight, and current market value influence the gold evaluation, which determines the loan amount borrowers can access.

Caratage and Purity

The term Carat or Karat defines the purity of a precious metal. While 'carat' typically refers to the weight of gemstones and diamonds, and 'karat' to the purity of gold, in India, these terms are often used interchangeably to denote gold purity. 

The caratage of gold plays an important role during the gold loan appraisal process. Since gold, in its purest form, is a highly malleable metal, it needs to be alloyed with other metals to retain its shape. 

During the appraisal process, lenders evaluate the caratage and purity of gold. The higher the caratage, the higher the value of gold and thus, the loan amount that can be borrowed.

Market Price and LTV

LTV (Loan to Value) is calculated on the gold quality, weight, and market value and determines the maximum amount borrowers can avail against the value of their gold jewels. This value is calculated on gold parts of the jewellery and no other components such as metals, gems and stones. The Loan-to-Value (LTV) ratio is typically capped at 75% of the gold's market value, as regulated by the Reserve Bank of India. However, lenders may adjust this ratio based on their internal policies and factors such as gold purity and current market rates.

Interest Rates Offered

The jewel loan interest rate varies from lender to lender. The secured nature of the collateral allows lenders to mitigate risk, which often results in them offering competitive interest rates. These rates can be beneficial for borrowers as they can help save significantly on loan repayments in the long run.

Jewel loan applications are generally designed to be relatively simple, addressing the urgent financial needs of borrowers. However, it’s essential to understand the loan procedure to avail it on the best terms.