Factors such as your borrowing history and track of repayment impact your credit score immensely. This is why, before sanctioning any loan, lenders make it a point to evaluate applicants' credit scores to gauge their creditworthiness.
Curious to find out the impact on credit score for gold loans? Read along to learn about its effect and how availing of a gold loan can boost the same.
Gold Loan and CIBIL Score - The Impact
Here's how this secured loan option may influence borrowers' CIBIL score:
i. Gold loan application impacts the credit score
Just like any other loan option, applying for a loan against gold can decrease your credit score for the time being. Fortunately, the drop in score is negligible and a direct result of a hard inquiry by a lender to gauge the applicant's creditworthiness.
When lenders carry out an inquiry about applicants' credit history, it leaves behind a hard pull on his/her credit report for some time. While the drop in credit score due to query is minimal, applying for multiple loans within a short window could significantly hamper it and represent the applicant as a habitual borrower.
ii. Helps boost credit score
Lenders do not emphasise the need to have a high credit score to avail of a loan against gold. This allows individuals with poor or no credit scores to access funds and fulfil urgent financial requirements.
Subsequently, by repaying the borrowed sum, they also can increase their current score. Needless to say, a high credit score proves useful in taking out an unsecured loan at better terms more easily.
Is a Gold Loan an Effective Means to Improve Credit Score?
Gold loan is a popular financing solution that is rapidly gaining traction among borrowers. While its borrowing centric features such as high loan value and low-interest rate make it tempting, its easy eligibility requirement, especially low dependence on credit score, makes it a go-to option for most individuals.
On top of these, taking out a loan against gold also helps boost the CIBIL score, making it easier for potential borrowers to maintain a creditworthy status.
Here's how a gold loan to boost your credit score:
- Repay the loan on time and avoid losing your collateral
While some lenders may not levy any penalty for late EMI payment, as a borrower it is crucial to repay your debt on time. Timely payment helps to improve credit report, increasing CIBIL score, while delay in paying the same may leave a negative impact on your credit profile.
Before availing of a gold loan, make sure that you can repay the same in due time because failure to pay the debt could lead to the collateral’s auction. This leads to the loss of valuables and negatively impacts your credit profile. Needless to say, this brings down the credit score and also portrays you as a credit risk when you plan to take out a loan in future.
It is also advised to check the annual rate of appreciation in gold rates prevailing in the market before applying for a gold loan. So, if, due to some unavoidable circumstance, you cannot repay the debt, the lender would proceed to auction the pledged asset, i.e., gold.
Notably, the compounding interest rate and the depreciated market value will make you lose the collateral value. Additionally, your credit score for gold loan will suffer, and your credit report will reflect a negative status. This will eventually hamper your ability to take out a loan in the future.
Conclusion
A gold loan is an effective means of accessing funds. However, besides allowing to account for multiple requirements, this funding option also tends to influence borrowers' credit scores and help them improve their profile.
However, boosting credit scores is a time-consuming process. To improve and eventually increase your credit score, you need to be consistent with regular payments and pay off the entire debt within loan tenure.
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