Does a gold loan help in building your CIBIL score?

Ashok has had some financial losses in business over the past year and as a result, his CIBIL score has taken a hit. As a result he requires a personal loan to tide him over until such time that his business looks up. However, with a low CIBIL score, no leading bank or financial institution is willing to offer Ashok a personal loan. Will availing of a gold loan help Ashok resolve his immediate financial woes?

In a nutshell – the answer is yes. When banks and financial institutions approve personal loans, the product specifications as of today do not call for a credit report check. For someone like Ashok who is bogged down by a low score, starting afresh with a gold loan may just work out, but remember that in the long run you are again availing of a loan – and with every loan comes  a repayment schedule. What would be wise in such a scenario is to avail of the loan and use it to pay off the outstanding debt, and ensure that the gold loan is serviced well, that is timely and complete payments are made.

Unfortunately, there is no quick-fix solution to improve your credit score. It takes time and a fair amount of financial self-discipline in order to get your credit health back on track. It therefore becomes important to acknowledge that opting for a gold loan will work for the short term, but it should not be used as a crutch to fall back into a downward spiraling debt trap.

With gold being a popular investment option for Indians at large, gold loans have taken off well with a lot of action from both borrowers and within the industry itself. South India has seen an upward trend and accounts for approximately 80 to 90 percent of the business in the country. Some of the leading banks and non-banking financial corporations (NBFCs) offering gold loans include Muthoot Finance, Manappuram General Finance and Leasing, ICICI Bank, State Bank of India (SBI) and HDFC Bank.

Gold Loan

Things to keep in mind when availing of a gold loan

Before you sign off on any documentation agreeing to a loan, do not forget that you are proving a precious commodity as collateral. Choose your lender wisely and do some homework before you finalise on one – you do not want to wind up trusting a company akin to a fly-by-night operator and losing all your hard earned gold. Select a reputed bank or financial institution to keep your gold secure until you repay the loan.

Keep the end use in sight – if you plan to use the money to finance a wedding or maybe carry out some home repairs, ensure that you stick to your plan. Do not be tempted to avail of a higher amount as ultimately; you will wind up paying interest on every rupee you borrow. Hence, choose this option if you are confident of being able to repay the money as per schedule to avoid being penalised and possibly forfeiting your gold.

When you compare a gold loan to a personal loan, a gold loan has an advantage – not only in terms of documentation which is simpler compared to the paperwork required for a personal loan, but also when it comes to disbursement. With all in place, your gold loan is likely to be approved in a matter of hours. Further, the lower rate of interest also makes it more attractive to customers. Where a personal loan falls in the range of 15 to 26 percent, a gold loan may be available for a rate of interest as low as 11.50 percent. As with any other loan or credit card, compare pricing before you finalise – an NBFC or a lender from the unorganised sector may offer you a loan at a lower cost than a bank would. However if you choose to go to your local jeweller or moneylender, do exercise due caution and check the credibility of the lender – choose your financer wisely to protect your gold. Also, unlike a personal loan, gold loans allow you the flexibility of paying only the interest component during the tenure of the loan, followed by a lumpsum payment of the entire amount at the end of the tenure.

Gold loan and your credit score

Given that a gold loan does not require a cibil score check prior to approval, it is possibly the easiest way for credit to be extended across the market, even in semi-urban and rural areas. The association of gold with abundant wealth may have made this product taboo initially, but given the propensity of most people have towards investing in the shiny metal, reservations have been knocked off in favour of the ease of acquiring a gold loan, especially to avail of funds in an emergency.

While a gold loan also does not reflect on your credit report do not be lax when it comes to repayment. Treat it as you would any other debt you avail of and make sure you do not default. Unlike a personal loan, in this case you stand to have your gold sold off by the lender in order to make good their loss.

If you are using the loan to rebuild your credit score like Ashok (in the example cited) did, ensure that once your credit score is bank on track, you maintain a good credit history going forward.

Nothing signifies good credit health like a good score, and in today’s times, having robust financial health is almost as important as being in good physical condition.