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One other thing before moving to color and clarity:
Total carat weight is not the same as carat weight when it comes to loan value. Jewelers always have pieces with a relatively small center diamond such as a third of a carat and with lots of small side diamonds. The total carat weight of the piece may be a 1.00 or even 1.50 carat or more. The small side diamonds usually have no loan value at all. It costs more to set them than to buy them. So the loan value of the piece will be the loan value of the 0.33 carat (e.g.) center diamond, which could be as little as $150. The customer may have paid $2000 to $3000 for the piece and thinks they have a 1.50 carat diamond ring that should be very valuable as collateral on a loan. But having all the carat weight in a single stone is what maximizes the loan value of the piece of jewelry.Click on the titles to add a comment
Clarity is a complex and problematic issue when it comes to defining loan value and I will write at least 2 blog posts on it. Much of the difficulty lies with the SI3 clarity grade but I will deal with that next time.
For now, let’s go back again to the 1.50 carat round diamond I have been using as an example. It was an SI1 clarity, G color diamond and had a loan value of $5700. A 2 grade increase in the clarity grade to VS1 raises the loan value to $6840, an increase of $1140. A 2 grade decrease in the clarity grade to SI3 decreases loan value to $3840, a decrease of $1860. Another one grade drop to an I1 clarity grade further decreases loan value to $2940, a $900 decrease from the SI3 loan value and a $2760 decrease from the SI1 loan value.
You can see how important it is to get the clarity grade correct. There are big jumps and drops in loan value. And it can be difficult to get the grade correct because I am grading the stone in the mounting the vast majority of the time and diamonds are often set to hide the stone’s inclusions. If I call it an SI1 and there are inclusions under a prong that make it an SI3, I will have more loaned out on the diamond than the dealers will pay if the customer abandons the loan and I need to sell it
This is part of the risk in my business and the pressure on me when doing the appraisal is always to call it the highest grade I can in order to both lend the most (I earn more then) and to be a financial solution to my potential new customer. If I let that pressure induce me to make a wrong call, I will then have hundreds or even thousands of dollars too much invested in the diamond.
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Let’s go back to the 1.50 carat round diamond I was using as an example. At SI1 clarity, a G color diamond would have a loan value of $5700 (3/27/15 price list, down a little from the last list). A 2 grade drop in the color grade to “I” decreases the loan value to $4560 and another 2 grade drop in color to “K” decreases the loan value to $3300. The 4 grade drop in color reduces the amount I can lend by $2400.
Color grading is the most difficult part of the appraisal process in my business. That is because I must almost always color grade the diamond in the mounting and the mounting can impart color to the stoneor otherwise mask it. The proper procedure and the one followed in the gemological laboratories is to have the diamond loose, table down in a grading tray under a grading lamp with a neutral, white background where it can be compared to master color grading diamonds. But in the real world of doing business by lending money on the value of mounted diamonds, I rarely have that opportunity. One of the risks of my business is getting the color grade wrong, usually by thinking it is better than it is, and then having more money in it that the dealers want to pay for the real color.
Dealers often tell me to appraise collateral at 2 color grades lower than it looks to me. They tell me this because if the collateral defaults, then they can buy it at a lower price. They are thinking like buyers and sellers and not like lenders. In our example above, if I really think the 1.50 carat round SI1 clarity diamond is a “G” color but follow their advice and assign a loan value to it as if it were an “I” color, then I lend them $1140 less ($5700 – $4560 = $1140). In doing so, I am less of a solution to their financial need and I forego the interest income that could be earned on that $1140. Only about 15% of my customers will abandon their loans and necessitate a sale of the collateral. So I choose not decrease the loan amounts on the 85% of my customers who are going to pay their loans and to call the color grade as best as I can determine it and lend the money that grade deserves.