How Does Gold Loan Impact Your Credit Score?

A credit or loan is a financial assistance that lenders endow to you with the trust of receiving the same on time with interest constituent. Lenders decide to lend you a specific proceed depending on your credit score and your past repayment record.

Your credit report reflects how well you can manage your credit repayments. So, to answer this, yes, credit or gold loan, in general, impacts your score.

Managing your gold loan and credit reports in a disciplined manner ameliorates your score. In contrast, negligence of any kind of loan repayment tends to negatively impact your score and eventually your chances of securing a loan in the future.

If you are looking for a credit option to stay at your disposal, then ensure to maintain a good score. To do this, you require learning about the distinct ways in which a gold loan and other credit options can impact your score.

Also, ensure to conduct a credit score check periodically to understand your credit standing and if it is low, then take the required steps to improve your score. 

To know the impact of the gold loan on credit score, discussed here are some crucial points you must know – 

Gold loan application – 

Have any idea that placing an application for a gold loan can have some impact on your score? Yes, it’s right. Simply placing an application for the gold loan option can lower your score even if it is just a few score points. How?

Each time you place an application for a gold loan directly on the website of the lender or by approaching the lender physically, credit bureaus consider it a hard inquiry.

Such hard inquiries are reflected in your report. A few hard inquiries on your report do not show up as any issue as without inquiring you cannot avail of a gold loan.

However, several hard inquiries being reported on your credit report in a shortperiodd might show you as a credit-hungry individual i.e., someone who desperately requires credit, which is not a positive sign. As an outcome, many lenders tend to reject your loan application.

Gold loan repayments – 

Once your lender agrees to provide you with the loan proceeds, you are required to read the terms and conditions and decide accordingly. Meeting the loan terms would enhance your score and failure to do this would reduce your credit score considerably.

The important ways where gold loan repayments may impact your score are as follows – 

Regular repayments – 

Making loan repayments on time or before is important for forming a strong score.

You as a borrower must ensure to pay your loan EMIs timely to show yourself as a credit-responsible individual, which makes you more attractive as a loan borrower than one who is not regular with their repayments of the loan. 

Lenders also prefer endowing gold loans to such loan borrowers. A few lenders may even provide a little relaxation on the gold loan rate of interest.

Ensure that the value of the gold that you provide as collateral is determined by the “gold price today” approach. You get the proceeds based on the ongoing gold market price of that day. 

Defaults on loan – 

A loan default happens when you are unable to meet the repayment of the gold loan obligation according to the loan terms and conditions. Even a slight delay in making repayment of the gold loan is reported to all the bureaus in India, who further add such details in your report, thus lowering your score substantially. 

Moreover, making required repayments of the credit within thirty days attracts penalties in the form of late payment charges and even other nominal fees.

However, defaulting on your gold loan consecutively for ninety days endows you with the tag of NPA (non-performing asset) on your report. This is a label that reduces your chances of availing a loan from other financial institutions.

Moreover, if you do not repay your gold loan timely, then you may get a legal notice stating that your gold articles are being sold to make up for the loan defaults. 

What are the important things you must factor in before availing of a gold loan?

Mentioned here are some of the important things you must ensure to factor in before availing of a gold loan – 

·       Value of the gold 

The value of the gold helps in determining the final loan amount that may be sanctioned. This means that valuation and loan proceeds are enhanced by the purity of the gold.

The lender does not factor in the additional jewelry design and stones when determining your loan proceeds. Only the actual gold price is factored in. Typically, lenders just offer loans on the gold with a purity level i.e., 18-24 carats. 

·       Comparison of the rate of interest 

Financial institutions decide the gold loan’s rate of interest as per your credit profile. The rate of interest is impacted by various variables involving payback period, loan amount, etc. 

·       Repayment options 

You can get a wide range of repayment options like EMI (equal monthly installments) using the online gold loan calculator.

Alternatively, you may decide on paying through the bullet method i.e., when your gold loan term comes to an end, you are required to make the payment of the whole amount with interest constituent. 

·       Ensure the bank lender is reliable 

Do not avail of gold loans from small businesses or jewelers as they may have unfavorable terms and conditions and may be unregulated. The prudent choice in such a scenario is to go for a reputable financial institution.

For example, you might rest assured about your gold’s security if you pledge your gold as collateral or security for a gold loan with any public sector bank like the State Bank of India, Bank of Baroda, etc. 

·       Foreclosure or prepayment charges

The lender might impose a charge of as high as 2 percent of the principal amount. Before going with a specific gold loan, ensure you read the conditions.

In the case, you opt for a floating interest rate regime, then your foreclosure and prepayment fees would be nil. However, in the case of a fixed interest rate regime, you may have to levy some charges on foreclosure or prepayment of your gold loan.