Will Taking a Gold Loan Affect My CIBIL Score in India?

When you need emergency funds, a Gold Loan is generally a useful alternative. However, a common concern among most people is the impact of a Gold Loan on their credit
score. People often ask, “Will Gold Loan affect CIBIL score?”. Understanding the relationship between the two can help you manage your finances better.

What is a CIBIL Score?

A CIBIL score is a track record of your repayments against different loans. It is proof of how sincere you are about repaying a loan on time.

A CIBIL score ranges between 300 and 900. A higher score indicates you are good at managing your repayment schedule.

Your CIBIL score is calculated based on various factors, including credit utilisation ratio, types of loans taken, repayment history and mix of credit types.
Financial institutions use your CIBIL score to determine your creditworthiness.

The higher your score, the more likely you are to secure a loan. The chances of securing a loan keep decreasing if your CIBIL score keeps falling under a certain range.

Does a Gold Loan Impact Your CIBIL Score?

Yes, a Gold Loan can affect your CIBIL score. Your credit score is directly impacted by the number and type of credit loans you take out.

Taking a Gold Loan can positively or negatively impact your CIBIL score.

1. Applying for a Gold Loan: Your credit score will drop the moment you apply for a Gold Loan.
   Financial bureaus launch a hard inquiry into your credit record the moment you apply for a loan. The more inquiries, the lower your score gets.
   Once the financial institutions have examined your credit score, they then decide whether or not you are eligible for a loan.
   If you want your credit score not to take a negative hit, try not to take too many loans within a short duration.
2. Impact of Credit Mix on Credit Scores: Your credit score is also affected by the nature of the loans you are taking.
   A good credit mix shows a healthy mix of secured or unsecured loans. Paying your outstanding loans on a timely basis improves your credit score as it shows your sincerity.
   This positively influences lenders to provide you with a loan on flexible terms.
3. Credit Utilisation Ratio: A credit utilisation ratio is the amount of credit you are taking. Your credit utilisation should be within 35% of your credit score calculation.
   Gold Loans are easy to secure, but taking a huge loan can disbalance your utilisation ratio.
   To prevent yourself from adversely affecting your CIBIL score, avoid taking a huge amount as a Gold Loan.
4. Payment of Loan: As long as you keep up with the monthly EMIs of your Gold Loan, your CIBIL score will stay the same or even improve.
   However, missing payments can severely affect your credit score.

How Gold Loan Repayments Can Impact Your CIBIL Score

Here are some ways in which the payment of Gold Loans can affect your CIBIL score. 

1. Repayment of Gold Loan on Time: Your CIBIL score is positively impacted by the history of your on-time repayments. Once you take a Gold Loan, you are required to repay the loan amount and interest in the form of monthly EMIs.
   Paying your EMIs on time improves your chances of subsequent loans.
   They also encourage a quicker loan approval process, flexible tenures, lower interest rates and more.
2. Loan Default:If you are careless with your loan repayments and keep missing out on your EMIs, your CIBIL score will be affected.
   This can affect your borrowing conditions the next time you seek out a loan.
   The Non-Performing Asset will prevent you from taking a loan from any lender if you have not paid your EMIs for three months straight.
   To prevent such unfortunate occurrences, have a clear conversation with your lender when
   drafting the repayment terms of your Gold Loan.

How to Ensure a Gold Loan Doesn’t Hurt Your CIBIL Score

To ensure a higher credit score, you need to consider the following:

Timely Repayment:

Make sure you are making all your EMI payments on time. You can choose to pay your EMIs on a monthly basis or at the end of the tenure.

Make sure you clearly communicate it properly at the time of taking the loan so that you do not miss out on any payments. Punctuality is the key to improving your CIBIL score.

Avoid Defaulting:

Defaulting occurs when you fail to make your EMI payments.

If you are unable to make a payment, communicate this to your lender to get alternate options that can save your CIBIL score from dropping.

Plan Your Finances:

Before taking a Gold Loan, carefully assess your financial situation.

Check if you are capable of paying back your loan without compromising your basic expenses.

Better financial management will prevent you from missing your EMI payments, which will reduce the risk of a lower CIBIL score.

Conclusion

So, does a Gold Loan impact your CIBIL score? The answer is yes, it can.

However, the impact can be both negative and positive.

Thus, you must borrow responsibly and make timely payments towards your Gold Loan to improve your CIBIL score.

Always be mindful of how you manage loans to keep your financial future bright.