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Does getting Gold Loan affect your CIBIL Score?

Financial security is one of the top factors that we tend to focus on in our lives in today’s modern world. We all realize that, at times, our regular income and savings might not be sufficient for an event or emergency. Hence, we have efficient loan and credit systems in place. Although credit cards do support us to pay a smaller amount to purchase a product or service, a loan is considered better when the amount required is significantly high. Even though there are numerous types of loans available currently, gold loan is probably the oldest and most effective form of loan credit to a borrower by a lender.

What is Gold Loan all about?

Also known as ‘loan against gold’, a gold loan is a type of loan which is provided to the borrower by the lender in lieu of gold articles. These gold articles need to be within 18 carat to 24 carat, and are kept as collateral by the lender.

Usually, the gold loan amount is calculated to around 80% of the current value of your gold article and depends upon its quality.

Gold loans have been amongst the most popular forms of loans as these provide significant benefits to both, the lender and the borrower. It is an excellent way to receive monetary assistance in case of urgent needs, such as for accidental hospital care when the insurance cover does not cover it, or is lapsed, and even for family functions, such as marriage, engagements, etc.

These are the top 5 reasons that make gold loan an extremely popular form of finance for Indians:

  • Swift – There are minimal documents required to be eligible for getting a gold loan. This means that your loan is disbursed faster than other forms of loans, where document processing and other verification procedures take up immense time.
  • Flexible – As a gold loan is provided only in lieu of gold articles, there are no strict rules which restrict your end use. Hence, a gold loan gives immense flexibility when it comes to its use and purpose.
  • Secured – A gold loan is a secured type of loan. All it requires is the borrower to pledge the amount of gold articles they feel comfortable with, in lieu of the loan amount. There is no other form of collateral or security required for a gold loan, besides the gold articles.
  • Easy interest rates – In comparison to other forms of loans, gold loans tend to have a significantly lower rate of interest, especially as compared to personal loans. The global standard of gold’s value ensures that gold loans are available at affordable rates of interest.
  • Liquidizes assets – Idle assets are ideally utilized through gold loan. The gold articles which are kept locked in your home or bank vault are extremely viable as an asset which can help you to get remarkable value for a loan against it, at almost any time of the year.

As for the interest rates of gold loans in India, these can differ anywhere as low as 9.24% and extremely high as 17%, depending on the individual lender’s policy. Normally, a nominal processing fee is also charged to process the gold loan application. This processing fee can be between 1% and 3%, again, depending on the individual lender’s policy. Finance experts highly-advise to always compare and check interest rates and processing fees of every potential lender, before deciding to choose one. Apart from these, it is also advised to check the charges and penalties for late repayment of loan as well as the pre-payment charges too.

Although gold loans are secured against the gold articles, you wish to keep with the lender, always remember that there are certain documents that may be required by the lender before processing your loan application. Although the specific number of documents varies from lender to lender, the commonly required documents for taking a loan against gold include:

  • For ID proof - Voter ID, PAN Card, Aadhaar Card, etc.
  • For Address proof - electricity bill, passport, driver’s license, Aadhaar Card, etc.

Another beneficial aspect of gold loans is that it gives you the right to foreclose the loan, whenever you wish to. Although majority of lenders will not charge for foreclosure, there are other lenders who may charge anywhere between 2% to 4% of the outstanding principal amount, as foreclosure charges. As for the tenure of gold loans, these are available for a flexible range of term period. You can take a loan against gold with repayment tenure of as low as 1 month to as high as 5 years, depending on the individual lender’s gold loan policy. It is highly recommended to consult with your loan provider and enquire about their specific stance for foreclosure of gold loans.

In all, financial experts advise borrowers to keep in mind 2 main factors before even applying for a gold loan:

  1. Amount of loan required
  2. Capability to repay required loan amount It is vital to consider these factors before requesting for a gold loan, as late repayment, defaulting on payment and other similar circumstances result in affecting your gold loan considerably.

How does Gold Loan affect CIBIL Score?

As consumers are becoming increasingly aware of numerous financial products, the CIBIL score is an excellent universal measure to estimate a borrower’s credit and loan behavior.

Financial institutes and banks all over the world have consorted to use the Credit Index Report (CIR) as base to provide individual borrowers with a CIBIL score. As the CIR consists of specifics of your loans or credits, their repayment history and other similar financial information, it becomes easier to rank borrowers accordingly, making it easier for finance providers to determine the assurance of loan repayment from any potential borrower of loans, even gold loans.

Currently, a CIBIL score of 750 and above is considered ideal for borrowers to get loans from major finance companies and banks. Hence, it is most important to have a higher CIBIL score for easy, affordable and fast loan approval.

In case you find your CIBIL score to be lower than required, then there are certain steps you can take to ensure it gets better, such as:

  • Timely repayment of all outstanding credit card and loan amounts,
  • Ensuring an ideal mix of unsecured and secured loans in your name,
  • Making sure to keep your credit card amount well within the maximum limit, on an average and
  • Avoiding multiple credit card and loans, especially when not expressly required.

Now, let us check how a gold loan can affect your CIBIL score, and what makes it better than the rest.

  • Loan repayment capability: Experts advise to opt for a gold loan only, and only, if you have a regular source of income which is more than sufficient to repay the gold loan amount, without affecting your regular budget and expenses noticeably. Ensuring that you have full ability to easily make loan repayments with prompt and punctual EMIs is of utmost importance to ensure better CIBIL score and avoid getting it reduced with defaulting or late repayment of loan amount.
  • Current value of gold : It is highly advised to check the annual rate of appreciation of gold prices in the market, before deciding the time for applying for a gold loan. In an event that you are unable to repay the loan amount and the lender is forced to auction/sell your collateral gold articles, the compounding interest rate combined with the depreciated market value results in not only loss of value of your collateral, but also adversely affects your CIBIL score. The lender will not update your loan status on the CIR as ‘Clear’; rather it would be stated as ‘Settled’, which is a down-marker for CIBIL score.

How to ensure higher CIBIL score with Gold Loan?

There are certain steps which can help you to actually increase your CIBIL score, as far as gold loan transactions are concerned.

Follow these steps to avoid adverse marks in your CIR and ensure higher CIBIL score:

  • Swift repayment – Make sure to repay the gold loan as quickly as possible, with timely EMI payments.
  • Adjust repayment – Even if you are unable to pay a couple of EMIs, ensure that you do not let the unpaid EMI amount collect to an extent that the lender is forced to sell your collateral gold articles for recovering the remainder of the loan amount.
  • Avoid collateral auction – Lenders are also flexible when it comes to repayment or delayed/missed EMIs when it comes to gold loans, as it is one of the most viable forms of secured loans. In such a situation, you can even borrow money from close relative, friends or family members to make the required payments for gold loan EMIs. This will ensure that you do not lose your valuable asset and the borrowed amount from relatives or friends can be paid easier than to the bank.

With these three simple steps, you can ensure that you never default on repayment of your gold loan and avoid losing your gold assets and prevent your CIBIL score from being negatively affected and become lower.