How gold loans affect your credit score – What every borrower should know

Gold loans are extremely attractive in India because they are easy to get, have minimal documentation and can be approved really fast. While thinking about your credit in general, and secured credit specifically, it is important to think about how a gold loan can affect your credit score. This guide breaks it all down with tips and frequently asked questions.

What is a gold loan?

To raise funds, borrowers are only required to pledge their gold jewellery or ornaments as security for a loan secured against the gold; financial institutions like banks and NBFCs provide this borrowing facility. Gold loans are really popular because the approval is very quick, the interest rates are low, and term flexibility is all short.

Understanding credit score

Your credit score is one of the critical measures of your creditworthiness. A credit score is between 300 and 900 and is based on the percentage of credit you're utilising, loan history, payment behaviour, and outstanding debts. Generally speaking, a score of 750 or higher is considered excellent.

How does a gold loan impact your credit score?

Positive impacts

• By showing financial discipline, making payments on time improves credit scores.
• Especially in the case of first-time borrowers, a gold loan helps build or improve your credit history.
• It adds a secured line of credit to help instil lender confidence.

Negative impacts

• When you miss payment dates, you negatively impact credit bureau reporting of your EMIs or bullet payments.
• When you choose a loan settlement option rather than a full settlement, it's a clear indication that you may be under financial strain.
• You can also be negatively impacted by poor credit performance leading to loan default or seizure of gold assets.

Swapnil Aggarwal, Director, VSRK Capital shared his opinion by quoting, “A gold loan can both positively and negatively affect your credit score. When you take a gold loan, the lender makes a hard inquiry against your credit report, which results in a slight, temporary decrease in your score. But the manner in which you pay off your gold loan leaves a longer-lasting impact. Payment of EMIs within time enhances your credit history and contributes to increasing your credit score over a period of time. In contrast, delayed or default payments severely damage your score and lower your creditworthiness,” he added.

What are the disadvantages of a gold loan?

1. Gold loss risk: If you don’t repay the loan, the lender can auction your pledged ornaments.
2. Short term: Most gold loans have a tenure of anywhere between six to twenty-four months and may be uncomfortable for some people.
3. Interest on bullet repayment: You may pay a higher interest rate by choosing the bullet repayment style.
4. No long term credit history value: Tenure is short, so it may not be very useful for building a long term credit history.

Is a gold loan reflected in your credit report?

Certainly. Your gold loan is reported to credit bureaus even if it is a secured loan. Your credit report will show your treatment of it including delays, loan closure, and disciplined payments.

What is the minimum credit score for a gold loan?

The great thing is you don't need a high credit score to acquire approval for a gold loan. Lenders are less interested in your credit history because the loan is secured by physical property; your gold. If your gold purity meets the lender's standards you might qualify for a gold loan even if your credit score is less than 600 or even own.

In conclusion, while a good credit score is not a requirement for gold loans, how you manage your loan will greatly impact how your future credit develops. Borrow with caution, pay back on time, and protect your financial future whether you borrow for personal expenses or to improve your credit score.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.