Can a Gold Loan Affect Your CIBIL Score?

When you need quick access to funds, pledging gold is one of the most practical solutions. A Gold Loan provides liquidity without selling your valuable ornaments. While Gold Loans are known for their speed and convenience, many borrowers still wonder: Can a Gold Loan impact the CIBIL score? The answer is yes. Since Gold Loans are secured borrowing options, lending institutions report your repayment behaviour to the credit bureaus, influencing your credit profile.

In the following sections, we will explore how borrowing a loan against gold can impact your CIBIL score, how repayments matter, and what steps you can take to manage your score with a loan.

Understanding Gold Loans

Before analysing their impact on credit scores, first understand how Gold Loans work. In a Gold Loan, you pledge gold with a loan provider to secure funds. They determine the loan amount based on the purity and weight of the gold. The higher the purity and weight, the higher the maximum Gold Loan per gram offered. The secured nature of these loans attracts quick disbursal, minimal documentation, and flexible repayment options. Since collateral lowers the lender’s risk, interest rates are often competitive compared to unsecured borrowing options.

How do Gold Loans Affect Your CIBIL Score?

Like any other form of credit, lenders report your borrowing and repayments to credit bureaus like CIBIL. Here’s how it works:

1. Loan Enquiry and Application

When you apply for a Gold Loan, the lender may check your credit profile to view your DTI ratio and repayment habits. This inquiry is recorded on your CIBIL report. While a single inquiry has a nominal effect, multiple loan enquiries within a short period can reduce your score.

1. Repayment Behaviour

Repayment is the most significant factor in your credit profile. Timely payment of credit products positively reflects on your report. On the other hand, delays or defaults damage your score, reducing your ability to secure future loans.

1. Loan Closure and Settlement

Once you repay the loan, lenders report the closure status to the credit bureau. A "closed" status indicates responsible borrowing, which improves your score. However, if you settle the loan by paying only part of the outstanding amount, the record will remain as "settled" and appear negatively on your profile.

Why Repayment Discipline is Key?

When you borrow a loan, lenders want to get their money back with interest on time. Therefore, repayment history is one of the most significant factors affecting the CIBIL scores. It accounts for around 35% of your score. A Gold Loan is no exception.

For instance, a borrower pledges gold worth Rs 4 Lakh and receives Rs 3 Lakh as per the maximum Gold Loan per gram policy. They pay their EMIs on time and see their CIBIL score improving gradually. Another borrower delays payments. Despite having pledged valuable ornaments, the lender may foreclose on the gold and auction it to get their money back. Finally, they report this loan default to the credit bureau, leading to a drop in their credit score.

Thus, a Gold Loan has a direct impact on your CIBIL score. Timely repayment can build your credit history while loan default may damage it, depending on how responsibly you handle it.

Benefits of Gold Loans for Credit Building

Now that you understand how Gold Loans impact your credit score, you may use this credit option as an opportunity to strengthen your CIBIL score. Here are some benefits that borrowers may enjoy with a Gold Loan:

• Easier Access for First-Time Borrowers: Those with no credit history often find it difficult to access other types of loans and credit cards. A Gold Loan can be their first loan, which they can use to establish a credit history with a consistent repayment history.
• Quick Improvement in Scores: Since lenders promptly report your repayment habits to the credit bureau, consistent EMI payments can lead to a faster improvement in your CIBIL scores.
• Easier Loan Terms: Since the loan is secured against gold, lenders are more willing to offer flexible repayment schedules, making it easier for borrowers to repay on time.

How Mismanagement Affects the Credit Score?

While the advantages are clear, mismanagement can hurt your credit score significantly. Some common pitfalls include the following:

• Ignoring Interest Payments: Some borrowers believe that as long as the gold remains pledged with the lender, they can delay interest or EMI payments. This is a misconception, as lenders report each missed EMI payment to the credit bureau, hurting your CIBIL score.
• Overleveraging Gold Assets: Offering gold multiple times across lenders leads to multiple inquiries and risks of over-borrowing. Borrowing more than the maximum Gold Loan per gram makes repayment stressful and damages your credit health.
• Settlements Instead of Full Repayment: Settling a loan rather than repaying in full reduces your financial burden in the short term but leaves a long-term negative entry on your credit report.

Factors Determining the Maximum Gold Loan Per Gram

Since the loan amount directly affects repayment obligations, understanding the criteria behind the maximum Gold Loan per gram is vital:

• Purity: Lenders prefer 18 to 22 carat jewellery as the benchmark and strictly follow standards for gold purity as per RBI directions.
• Market Price: The daily gold rates influence the per-gram valuation based on the lower of the 30-day average price or the previous day’s price published by the India Bullion and Jewellers Association Ltd. (IBJA) or SEBI-regulated commodity exchanges.
• Loan-to-Value (LTV) Ratio: As per the RBI guidelines, loans must adhere to maximum LTV limits on an ongoing basis:

1. For loans up to Rs 2.5 Lakh: maximum LTV is 85%
2. For loans between Rs 2.5 Lakh and Rs 5 Lakh: maximum LTV is 80%
3. For loans above Rs 5 Lakh: maximum LTV is 75%

• Lender’s Policy: Some lenders offer flexible schemes where repayment terms influence the per-gram loan amount.

Additionally, RBI caps the aggregate weight of pledged gold and silver ornaments and coins:

• Gold ornaments: maximum 1 kilogram; silver ornaments: maximum 10 kilograms.
• Gold coins: maximum 50 grams; silver coins: maximum 500 grams.

By understanding these factors, you can make informed decisions and avoid over-borrowing that may make repayment stressful and damage your credit history.

Best Practices to Save Your CIBIL Score

Here are a few practical steps to ensure your Gold Loan boosts your credit score rather than harming it:

• Borrow Within Your Capacity: Even if you are eligible for the maximum Gold Loan per gram, borrow only what you need and can comfortably repay.
• Set Reminders for Payments: Missed deadlines are the most common cause of reduced credit scores. Automate payments or set reminders to avoid this.
• Avoid Multiple Loans at Once: Stick to one lender to reduce the number of credit inquiries on your profile.

(Note: RBI mandates that lenders monitor multiple or frequent sanctions of gold loans to the same borrower closely to detect and prevent misuse and fraud under the anti-money laundering framework.)

• Close Loans Responsibly: Always repay in full and collect a loan closure certificate. This reflects positively on your report.

A Gold Loan directly influences your CIBIL score. Timely repayment can improve your credit profile, while defaults or settlements can harm it. The key lies in responsible borrowing. If you wish to unlock the true value of your gold while keeping your credit score intact, choose a trusted lender with transparent policies, competitive interest rates, and flexible repayment options.