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Explained!!! How gold loan affects the credit score

Customer seen checking credit score

According to the latest reports, India’s gold loan market is expected to reach Rs 4,617 billion by 2022 with India being the second largest consumer of gold.

Talking about the current market scenario, the month of July ’20 has seen a sharp rise in gold prices even during the COVID 19 times. This in turn has given boosting effects to gold Loan business in India. RBI also identified this as one the important lending product to cater the current demands in semi urban and rural markets for bridging the demand for credit to restart business post lockdown as majority credit lines were blocked or already exhausted to meet the liquidity in business operations.

As per World Gold Council, Indian households have accumulated up to 25,000 tons of gold in various forms like gold coins, gold bars, gold jewelry and many other items made of gold.

Eventually raising the bar and consumption of gold in the country as still the larger portion of the households prefer investing in physical gold and procure it for future usage like jewelry for family functions, gifting to closed ones, standard bullion investment for future savings. Social and emotional values are also attached with Gold, which may be inherited or procured.

While all the above investments are done and enjoyed, it is now time to reap the benefits of the investments made in buying gold. As we, all know investments are made to tackle tough times, and here is when the simplest investment done in gold comes to our rescue. We Indians have high sentiments attached to gold and the best option that we find is to avail a loan against gold.

Owing to the pandemic, there is a significant increase in the demand for gold loans from last few months arising especially out of tier 2 & tier 3 cities in order to fulfill emergency needs.

Gold Loan & CIBIL Score

CIBIL Score and loans go hand in hand, as it is an important criterion for any lender to assess the borrower’s background and payment history. Although gold loan comes into the category of secured loans, the borrower here lends his/her gold to the Financial Institution as a collateral to avail a loan against gold with LTV(Loan to Value) norms set by regulator body i.e. RBI. Gold loans are a better option as compared to other types of loans when there is an immediate need of cash and it comes to one’s rescue when other loans are not available to a borrower.

Here, the borrower has a chance to improve their CIBIL score by repaying EMI/interest on time or rather before time to avoid any adverse impact. Practicing punctuality in case of loan repayment is the key.

Gold loans are easy to avail, as they are hassle free, requires minimum documentation and their disbursal process is also faster as compared to any other loan.

CIBIL score is one of the important factors in any loan credit underwriting process, hence the higher the score of the borrower the lower is the risk of default over repayment. In the gold loan business all the banks and a few of the organized NBFCs are taking this cognizance, therefore borrower repayment data gets submitted to CIBIL during defined intervals to update the credit score ratings. Therefore, the regular repayment shows STD payments and skipped repayment will reflect as overdue because when the dues are cleared and fully paid or account is closed, the same is re-updated with refreshed details, which help minimize the negative impact.

Particularly in case of any big ticket gold loan beyond the certain threshold set by finance companies, CIBIL check is one of the critical factors for extending larger amount beyond the KYC compliance, as income documents are not required to process the gold loan due to high liquidity of collateral in the market. Hence, in gold loan proper repayments hold key to offer large ticket gold loan and allow extension/renewals. CIBIL score and overall credit ratings are only base for extending larger credit as its no income assessment product. Similarly, on the other hand, irregular repayments done in other loans or even in gold loans can hamper the credit score and can create hurdles for availing a new loan, receiving pre approved offers from the financial institution. For gold loan top up, other unsecured loan or EMI card offers regular repayer gets rewarded by some financial institutions with the benefits of interest rebate for timely payment to ensure the CIBIL also remains intact.

It is a standard payment product and any missed payment can be paid any day before next due date and interest are billed on a daily basis which does not affect the credit score of the borrower. In various companies, even client can pay before 3 / 7 days of due date to avoid the delay in repayment to safeguard his credit track. Not all the financial institution, but a majority of them offer interest only gold loan i.e. only monthly interest payment is expected to be made by the borrower and principal repayment can be done in the bullet payment form at the end of the term to close the loan or even do renewal for next term which is customer’s choice.

Gold loans are easily available with or without CIBIL checks, but if the repayment track is clear, whether old or new loans, it will always add to improve the CIBIL score and also help to meet the emergency or business needs of the borrower.

By following these simple steps, you are a step closer to availing a Gold Loan and do make sure to do timely payments in order to avoid losing your gold in probable auctions in case of default and negatively affecting your CIBIL score.

Category : Gold Loan   |  Date : September 1, 2020, 12:29 pm   |  Author : Shailendra Wade, Zonal Business Head: ROI, Fedbank & Nikita Pardeshi

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