We Indians are fond of gold. Not only does gold hold investment value, culturally we show an affinity towards gold. In fact, a study by the World Gold Council in 2017 revealed that Indians households, form the world’s largest hoarders of gold, holding a record 23,000-24,000 tonnes of the precious metal, worth at least $800 billion. Though the fancy for this metal has decreased after demonetization, gold still holds a strong place here.
Gold loans have been a traditional and popular way of raising funds in India. Earlier, these transactions happened with the unorganized sector and individuals were fleeced and charged exorbitant rates of interest. However, now that there are regulations in place, many organized players have surfaced in the gold loan segment.
Let us start with knowing more on how to go about getting a gold loan and how they can help you build up your credit score.
What are Gold Loans?
Gold loans are secured loans lent on the security of gold. This could be in the form of jewelry or bars of specified standard. The generally accepted standard of gold for gold loans is between 18-24 carats. Around 75- 80% of the market value of the gold pledged is eligible as a loan.
What Is The Procedure And Documentation Involved In Gold Loans?
As gold loans are borrowings backed by security, it takes less time for processing and does not need extensive documentation as well like other loans. Identity and address proof along with your photographs are all the documents you need for availing a good loan. Also, when you go to a known lender, they are equipped with an in-house evaluation and verification service which end up saving time for you.
The gold pledged by you to the bank is kept safe in their vault, so you could be assured that your asset is in safe hands.
Minimum And Maximum Amount That Can Be Availed Through A Gold Loan?
The minimum amount of a gold loan starts from as low as Rs 1500 and can go as high as Rs 1.5 crores. There are no upper limits specified by the lenders. It depends on the gold pledged for the loan.
Is Any Interest Charged On The Gold Loan?
Gold loans do carry an interest rate in the range of 9%-15% depending on the lending institution and the current economic situation. The interest rate is also linked to the Loan to Value (LTV). Higher LTV loans carry a higher percentage of interest rates than lower LTVs.
These days lenders have come up with newer concepts, wherein gold loan can be availed and interest can be paid only up to the exact day of borrowing, irrespective of the maximum tenure for which the loan was availed. There are no prepayment charges levied on gold loans. A processing fee between 1-3% of the loan amount is also charged by most lenders.
Advantages of availing a gold loan
Faster process with minimal documentation
Can put an illiquid asset like gold to best use to tide over financial troubles
The rate of interest being charged is less expensive compared to a personal loan
The usage of the loan is open-ended like a personal loan. The borrower is free to put it to any use
Can be prepaid at any time without incurring any additional charges
Security of your gold is assured during the period of the loan
The value of gold is assessed at market value always irrespective of the price of the gold that you bought it for. This works to your favor in a rising gold price scenario.
Credit Score and Gold Loans
Credit Score has become an important part of your financial life. You require it to avail any kind of credit. And just any credit score doesn't work; only a good credit score will help you avail credit at lower rates of interest along with other favorable terms.
There might have been various circumstances which could have pulled your credit score down, such as a missed loan repayment, defaulted credit card bill, increased number of hard inquiries or applying for credit often or a credit mix skewed towards unsecured loans.
Once your credit score goes down, it is difficult to obtain further credit and you may never know when the need for credit could come up.
There may also be certain individuals who face the problem of no credit score as they have never availed credit. It is difficult for lenders to assess the creditworthiness of such borrowers, hence these individuals find it hard to avail credit.
A situation of no credit score is akin to a chicken and egg situation. Without a credit score, you can't avail credit and you can't avail credit without a credit score.
For those who face low credit score or no credit score, availing gold loan can become a great way to build their score or kick-start their credit history.
How Can Gold Loans Help You Improve Your Credit Score?
As we have learned above, availing a gold loan comes with its own benefits. Gold loan is a good credit product even for those who are struggling with their credit score.
Credit Score is not a mandatory requirement: As the gold loan is a loan based on the security/collateral provided in form of gold, a credit score is not a requirement.
A credit score is a numerical representation of the creditworthiness of an individual and hence it is mandatory for other loans like personal loans, home loans, vehicle loans etc.
Home loans and auto loans are also secured loans ie., backed by an asset, but the assets which are provided as a collateral are not in the physical possession of the lender. They are merely hypothecated with the lender (in case of a 2/4 wheeler). And in the case of home loans, the title deed of the document is retained by the lender.
Anyone can avail a gold loan, provided you have gold to pledge, as credit score is not a mandatory requirement here.
So gold loan is a form of credit that is easier to avail.
Regular Repayments of Gold Loan Helps Your Credit Score: Just like any other loans, gold loans are approved on a set rate of interest and for a tenure like any other loans
As with other borrowings, regular repayments are required for a gold loan too. All repayments on gold loans are reported to the credit bureaus. So, when you are regular with your loan repayments on your gold loan, it is seen as a positive development towards building a good credit score.
You can aim to improve your credit score with a gold loan which costs much lesser than a personal loan.
But gold loan should be approached with caution. They undoubtedly give you the opportunity to build up your credit score, but you should go ahead for this loan and pledge your gold only when you are sure of repaying on time, or you could risk losing your precious asset and damage your credit score further.
Gold loans do come across as an efficient way of building up your credit scores at a lower rate of interest in comparison to a personal loan. However, the bottom line of availing any kind of credit is to be prompt and responsible towards repayments. Only then can you have a good credit score.