How Gold Loans Affect Your CIBIL Credit Score

As Indians, we have a deep emotional connection with gold. Beyond its cultural significance, gold also serves as a valuable financial asset that can be leveraged for securing loans during times of need. Gold loans have gained immense popularity due to their ease of access, minimal documentation, and relatively lower interest rates compared to other unsecured loans. However, before you pledge your precious gold to avail a loan, It’s important to know how a gold loan and your credit score, especially your CIBIL score, affect each other.

Understanding Gold Loans and CIBIL Scores

A gold loan is a secured loan where you borrow money against your gold jewellery or coins. The amount of loan sanctioned depends on the value and purity of the pledged gold. On the other hand, your CIBIL score is a three-digit number ranging from 300 to 900, which reflects your creditworthiness based on your credit history and repayment behaviour. So, it is important to know how the CIBIL score works for gold loans.

How Gold Loans Can Boost Your CIBIL Score

It is essential to know about gold loans and their credit score impact.

• Timely Repayments: When you consistently make timely repayments on your gold loan, it demonstrates your financial discipline and responsibility. Each on-time payment is reported to the credit bureau. Gold loan repayment gradually improves your CIBIL score over time.
• Credit Mix: Having a diverse credit mix, including both secured and unsecured loans, can positively influence your credit score. By adding a gold loan to your credit portfolio, you showcase your ability to manage different types of credit effectively.
• Lower Credit Utilisation: Since gold loans are secured, they often come with higher loan amounts compared to unsecured loans. By opting for a gold loan instead of maxing out your credit cards or taking multiple personal loans, you can maintain a lower credit utilisation ratio, which is viewed favourably by credit bureaus.

Potential Negative Impacts of Gold Loans

Let us look into some of the potential impacts of gold loans on the CIBIL score:

• Missed Payments: Just like any other loan, defaulting on your gold loan repayments can severely damage your CIBIL score. Late payments or defaults are reported to the credit bureaus, leading to a significant drop in your credit score.
• High Debt Burden: If you already have multiple loans and credit card debts, taking on an additional gold loan can increase your overall debt burden. High levels of debt can strain your finances and make it challenging to manage repayments, potentially harming your credit score.
• Auction of Pledged Gold: In case of continuous defaults, the lender has the right to auction your pledged gold to recover the outstanding loan amount. While this action may not directly impact your credit score due to the gold loan, it can have serious financial consequences and hamper your ability to secure loans in the future.

Scenarios Where Gold Loans Can Be Beneficial

Let’s look at a few situations where taking a gold loan can be a smart financial move:

• Emergency Funds: Gold loans can be a quick and convenient source of funds during medical emergencies, unexpected home repairs, or other urgent financial needs. By leveraging your idle gold, you can access funds through a gold loan without impacting your credit score.
• Business Expansion: Small business owners often face challenges in securing traditional bank loans due to limited credit history or collateral. A gold loan can provide the necessary capital to expand operations, purchase inventory, or cover short-term expenses.
• Debt Consolidation: If you have multiple high-interest debts, such as credit card balances or personal loans, consolidating them into a single gold loan with a lower interest rate can help you save on interest costs and streamline your repayments.

Tips for Managing Your Gold Loan Wisely

To ensure that your gold loan works in favour of your credit score, consider the following tips:

• Borrow Within Your Means: Assess your repayment capacity before applying for a gold loan. Borrow an amount that you can comfortably repay without straining your monthly budget.
• Timely Repayments: Make it a priority to pay your gold loan EMIs on time, every time. Set up automatic payments or reminders to avoid missing due dates.
• Maintain a Healthy Credit Mix: While gold loans can be beneficial, avoid relying solely on them. Maintain a balanced mix of secured and unsecured credit to demonstrate your versatility as a borrower.
• Monitor Your Credit Score: Regularly check your CIBIL score for gold loans and your credit report to stay informed about your credit health. Identify any discrepancies or errors and get them rectified promptly.

Example: Rajesh, a small business owner, needed ₹2 lakh to purchase inventory for his store. He pledged his wife’s gold jewellery and availed a gold loan at 12% interest for a 24-month tenure. By making timely repayments, Rajesh not only met his business needs but also improved his CIBIL score by 50 points over the loan tenure.

To Summarize…

Gold loans can be a double-edged sword when it comes to your CIBIL score. While timely repayments and a healthy credit mix can boost your credit profile, defaults and high debt levels can have a detrimental effect. Before applying for a gold loan, assess your financial situation, borrow responsibly, and have a gold loan repayment plan for CIBIL score in place.

Remember, your CIBIL score is a reflection of your financial discipline and creditworthiness. By managing your gold loan wisely and making informed borrowing decisions, you can leverage this secured loan to meet your financial goals while simultaneously building a strong credit profile.

If you’re considering a gold loan, Airtel Finance offers attractive interest rates and flexible repayment options. Check your eligibility and apply for a gold loan through the Airtel Thanks app today!

FAQs

1. How much loan can I get against my gold?
   The loan amount depends on the value and purity of your gold. Typically, you can get up to 75% of the gold’s market value as a loan.
2. Does checking my CIBIL score impact it?
   No, checking your own CIBIL score is considered a soft inquiry and does not affect your credit score. You can check your score for free on the Airtel Finance website.
3. Can I prepay my gold loan before the tenure ends?
   Yes, most lenders allow the prepayment of gold loans without any additional charges. Prepaying your loan can help you save on interest costs and improve your credit utilisation ratio.
4. What happens if I default on my gold loan payments?
   Defaulting on your gold loan payments can lead to late fees, penalties, and a significant drop in your CIBIL score. If you continue to default, the lender may auction your pledged gold to recover the outstanding amount.
5. How long does it take for a gold loan to reflect on my credit report?
   Once you avail a gold loan, it usually takes 30-60 days for the lender to report it to the credit bureaus. The loan will then appear on your credit report and start impacting your CIBIL score based on your repayment behaviour.