How Beneficial Is Gold Loan For The CIBIL Score And Credit Report?
Understand in detail how a gold loan affects your CIBIL credit score. Learn the benefits of borrowing a gold loan to improve CIBIL Score & credit report.
Every person must meet both short- and long-term financial needs. This can be done via prudent planning by saving over time while ensuring the expenses are not totally out of tune from the salary or other monthly income.But it is not always possible to match the inflows and outflows or income to expenses and often one has to dip into savings to meet the balance. Sometimes this, too, is not enough to cater to sudden expense heads that arise or are likely to come up in the near future.
In such cases, one has the option to take out a loan to meet the expenses. This can be via different forms of secured or unsecured debts. In the case of the former, one provides a collateral to give confidence to the lender that the money will be returned.Here, one can avail different types of loans such as a loan against shares or a gold loan. A gold loan is considered an excellent choice for those looking to take a short-term loan. Such loans come with a lower interest rate compared to a plain vanilla personal loan and can be availed in a jiffy these days.
Gold LoanA gold loan is a form of secured debt where the borrower places her or the family’s gold ornaments as a collateral to get money for short-term use. The borrower temporarily holds the gold jewellery and lends against it. When the money is paid back the jewellery is returned to the borrower.
The value of the gold jewellery is crucial. The valuation is done by an expert, who takes into account the weight and purity of the yellow metal in the jewellery. The valuer does not factor in weight of other precious stones as they do not have a standard pricing structure and benchmark.Moreover, the loan is provided after accounting for a margin, which means the entire value of the old jewellery is not the amount that can be borrowed. Lenders keep a buffer to factor in sudden price declines to cover up the value of the collateral. However, historical evidence shows typically such cases are rare and the buffer is enough to cover for the loan dues.
A gold loan is not just the best form of borrowing in the short term due to low interest costs, but they also are seen as a good form of lending for the financial institution as these are secured with the value of the gold and the risk of default and write-down is minimal, if any.
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CIBIL ScoreA lender typically takes into account the credit history and the credit or CIBIL score of the borrower. The score is captured in a three-digit number that ranges between 300 and 900. A score above 750 virtually guarantees a loan, though not necessarily so.
Notably, in the case of a gold loan the CIBIL score does not play a significant part as the lender already has a recourse given the collateral. But it does have an impact on the CIBIL score.
How Gold Loan Can Help CIBIL ScoreA gold loan can help a person with his or her CIBIL score in more ways than one.
• Create A Score:For starters, if one is new to the job market and does not have a credit card or any other loans from the past, it could be difficult to generate a CIBIL report. They can actually use a gold loan to build a credit history.
This can be done by availing a gold loan, howsoever small, and make sure one repays it on time. This helps create a good repayment record.
• Improve:If one has a poor CIBIL score, a gold loan can help in improving it. One can take a gold loan and pay it back on time. This tends to be noted in as a good credit behaviour and pushes up the score. While it may or may not be enough to make a person move beyond the threshold of ‘750’, it may pull up the person’s score enough to get one or more NBFCs to lend and that too at better terms than without the gold loan.
ConclusionA gold loan is considered the best form of short-term borrowing. This is because it can be taken without any hassle and scrutiny as long as the value of gold in the ornament is more than enough to cover the borrowing amount. It also comes with the lowest rate of interest compared to other short-term loan products such as a personal loan for instance and higher loan to value ratio compared to say a loan against shares.
In fact, they can also be helpful in building the CIBIL score. A gold loan can be taken to build a credit history if one has none. It can also be used for improving one’s CIBIL score.
IIFL Finance, one of India’s top non-bank lenders, offers gold loans at attractive interest rate via a swift digital process with minimal documentation. It also provides flexible repayment terms that help borrowers pay back the loan without stress on their finances and improve the credit score.
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