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How Color Affects Loan Value

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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.

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Hull Blog Introduction

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Welcome to the Hull Diamond Blog.

I conceive of this as a place to discuss all things diamond. Since I am in the business of lending people money based on the value of their diamond jewelry in secondary markets, this discussion may focus to some extent on the issues that make a diamond more or less valuable as collateral on a loan. But it can go anywhere that people want to go with it.

So what makes diamond jewelry more or less valuable as collateral? Generally speaking, large, high quality single diamonds have the most value as collateral. Rounds diamonds have more value than other shapes. Forty years ago, marquise shaped diamonds (think football) were the next most valuable but they were supplanted by princess cuts (square) in the 1990s and early 2000s and now the market is moving away from these as ovals and cushion shaped diamonds are more in demand and therefore more valuable. The demand for marquise and heart shaped diamonds is so weak, that when I get presented with one as collateral these days, I estimate the carat weight that would result by recutting the marquise into an oval, and the heart into a pear and then calculate the loan value.

So, a well cut 1.50 carat round diamond with G color and SI1 clarity would have a loan value of $5840. A 1.50 carat oval or cushion of the same G, SI1 quality would have a loan value of $4680. A 1.50 carat marquise diamond with a 2:1 length to width ratio would recut to about (I estimate) a 1.25 carat oval and have a loan value of $2800. Shape matters.

To demonstrate the difference that size makes, a 0.75 carat round diamond of the same quality would have a loan value of $1290 compared to the $5840 for the 1.50 carat: half the size but only 22% of the loan value. And a 3.00 carat round diamond of the same quality would have a loan value of $21,240: only twice as big as the 1.50 carat, but 3.6 times the loan value. Size also matters when it comes to diamonds.

Next time, I will address how difference in color and clarity affect the loan value of the diamond.