How Does Gold Loan Affect Your CIBIL Score?

Gold is one of the most common options for secured loans among Indians. With a gold loan, you can borrow money at a reasonable interest rate in exchange for the gold you provide.

A gold loan can affect your CIBIL credit score as it is a personal loan that you might need to meet your financial obligations. Your credit score shows how responsible you are with payments and how healthy your credit is.

Your gold loan CIBIL score is impacted if you take out any credit instrument. Hence, a gold loan affects your CIBIL credit scores even though you use the gold as a kind of security and borrow money against it. You should be aware of how a gold loan might affect your credit score to avoid harming it and, subsequently, your chances of obtaining any loan. Continue reading to learn more about the relationship between gold loans and CIBIL scores.

What is a CIBIL Score?

The credit score of a consumer is known as a CIBIL Score. Simply put, this is a three-digit numerical representation of a person's credit profile and credit history. An applicant's chances of having their credit card or loan application approved are based on their CIBIL Score, which ranges from 300 to 900.

The closer their CIBIL Score is to 900, the better. The CIBIL Score reflects a customer's creditworthiness because it is believed that a person's previous credit behavior is a good predictor of their future behavior and that is why it is crucial to have a high CIBIL Score. Before processing any loan, it is now required by the RBI to take a person's credit score into account.

How Does Gold Loan Affect Your CIBIL Score?

Your credit score may be negatively or positively affected by any lending in your name. Find out more about it here:

1. Application for a gold loan

Merely applying for a gold loan will lower your credit score. Your credit record is requested from the credit bureaus when you apply for gold loan or any other type of credit, and this process is known as a "hard inquiry."

Then they'll decide whether or not to approve your application. Your credit report will show the results of each hard inquiry, and your credit score will drop with each one. If you don't want to appear credit-hungry, avoid having multiple inquiries reflected on your credit report, especially within a short period of time.

2. Payment of gold loan

Your credit score will increase if you meet your loan requirements; if you don't, it will significantly decline. Following are some of the ways how your payment of gold loan may affect the CIBIL:

• Repayment of gold loan on time: Your history of on-time payments impacts your gold loan CIBIL score; therefore, repayment of gold loan in a timely manner will help you establish a more substantial track record of regular payments. You would be required to pay a set sum each month if you choose EMI (Equated Monthly Installments) to repay the gold loan amount. Your chances of obtaining future loans at a better rate and with a quicker approval process will increase if you pay your EMIs on time.
• Loan default: When loan instalments are missed for a predetermined time, default occurs. The delay is reported to the credit agencies, and the information appears in your credit report when you miss a payment and cannot repay the entire loan amount. 

Your credit score will be affected by this. However, the NPA (Non-Performing Asset) classification on your credit report will prevent you from receiving a loan from any other lender if you default on a gold loan for 90 days in a row.

It may impair your ability to obtain credit in the future and may result in the seizure of personal property. It's crucial to speak with your lender or loan servicer about renegotiating your loan terms if you find yourself unable to make timely payments. 

Also Read: Benefits of Gold Loan

Things to Consider Before Taking a Gold Loan

Here are a few critical things that you need to consider before taking a gold loan:

1. The gold's value determines the loan amount

The value of the gold will determine the final sanctioned loan amount. This implies that the valuation and loan amount will increase in proportion to the gold's purity. The lender will not consider the additional stones and jewellery design; just the actual gold price will be considered. Typically, lenders will only provide loans on gold that is 18 or 24 carats pure.

2. Comparison of Interest rates

The lender determines the interest rate for the gold loan according to your profile. The interest rate is affected by several variables, including loan amount, payback period, etc.

3. Options of repayment

You can avail of a wide variety of repayment options, such as equal monthly installments (EMI), using our gold loan EMI calculator. Alternatively, you can decide to pay via the bullet payments method; when your loan term expires, you pay the entire amount, together with interest.

4. Make sure the lender is reliable

Avoid availing loan from a jeweler or a small business because they might not be regulated and may have unfavorable terms. The best choice is to go with a reputable, certified financial institution. For instance, you may rest assured knowing that your gold will be safe with a respected organisation like the Bank of Baroda, which has acquired the title of one of India's most trusted banks.

5. Loan disbursement period

Checking that the lending institution offers swift gold loan disbursal and simple access to funds for personal or professional purposes is crucial. For instance, the Bank of Baroda ensures a simple documentation procedure and transparent pricing.

6. Prepayment and foreclosure fees

The lending institution may impose a penalty of up to 2% of the principal sum. Before accepting the gold loan, make sure to read the terms and conditions. In our bank, prepayment and foreclosure charges are NIL.

Also Check: Gold Loan Eligibility

Key Takeaways

Your gold loan CIBIL score can raise with regular repayments, while several loan inquiries can lower it. A legal notice, additional costs in the form of late payment fees, and other penalties are just a few of the repercussions of defaulting on a gold loan.

Set a reminder on your phone or computer if you frequently forget when your loan payments are due, owing to your hectic schedule. Asking your lender to deduct the amount from your bank account directly is another step you may take to prevent late payments.