Does a Gold Loan Increase a Credit Score Fast?

Gold loans have become quite a rage in India over the last few years. The country’s burgeoning gold industry has increased demand for loans against the asset. It has resulted in banks offering several such loans, which individuals, as well as businesses, can avail of. In this article, you will find out whether a gold loan can help improve your credit score and the other benefits of taking a loan with gold as collateral. 

What is a Gold Loan?

A gold loan is a loan wherein the borrower sells gold to the lender and receives a loan against the same. The borrower provides gold on a pledge, and the lender exchanges the loan. It is one of the oldest types of collateral, which is why gold has been used as currency for so long. The gold loan has become popular again due to the increasing demand for bullion in the country and the low interest rates on offer by banks.

How Does a Gold Loan Work?

The gold loan works on the principle of pawnbroking. It means that the lender takes possession of the gold and holds it as security for the loan. The borrower is responsible for paying interest on the loan amount. This interest is charged as per the prevailing interest rate of the lender. The borrower pays interest on the loan amount plus the principal amount of the gold. Gold loans are popular again because of the increasing demand for gold in the country.

Can Gold Loan Improve Credit Score Fast?

If you’re looking to improve your credit score fast, a gold loan might be your best option. A gold loan is a small, short-term loan that uses gold as collateral. It means that the lender has access to your gold, and if you fail to repay the loan, they can sell it at auction. Because a gold loan is a short-term loan, it’s good for improving your credit score. It is because short-term loans are usually considered less risky than longer-term loans. And, given that a gold loan is a low-risk commitment, it is a viable option to improve your credit score.

It would help if you had good credit to get a gold loan – meaning your credit score should be above 650. It would help if you also had enough gold to collateralize the loan. And finally, you need to agree to pay the loan back within a set period. Because a gold loan is considered a low-risk loan, you won’t have to worry about high-interest rates or other penalties.

What is a Credit Score?

A credit score is a numerical rating assigned to an individual or a business by a credit report provider. A credit score is a reference that lenders use to decide whether to accept a loan request. A credit score is a three-digit number between 300 and 850. The higher the score, the higher the chances of getting a loan. 

The credit score is calculated based on the following factors: 

1.  Payment history: How much have you paid on loans in the past? 
2. Credit utilisation: How much of your total credit limit have you used? 
3. Length of credit history: How long have you been taking credit? 
4. Payment speed: How quickly are you repaying your existing loans? 
5. Credit mix: How many different types of credit do you have?

How to Improve Credit Score with Loan?

A good credit score is essential for anyone looking to borrow or take out a credit card. Fortunately, there are several ways to improve your credit score. Here are four tips:

1. Pay your bills on time: This is the most important step; if you can’t pay your bills on time, your credit score will suffer. Make sure to pay all your bills on time each month, and keep track of how much you’re borrowing each month so you know where you stand.
2. Keep your credit reports clean: If any accounts have been cancelled or closed, update your credit report as soon as possible. It will help improve your score because it shows that you’re taking responsibility for your actions.
3. Use a credit card responsibly: Don’t use your credit card to buy things you can’t afford; this will damage your CIBIL score. Instead, use it to buy things you can afford and pay off the balance in full each month.
4. Get a gold loan: A gold loan is a type of loan that has low interest rates and a limited prepayment penalty. It is a good option if you want to quickly improve your credit score.

Many Benefits of Gold Loan

There are various advantages to taking a gold loan. Some of them are given below: 

1. A secure transaction – Gold has been used as a currency for thousands of years. It has therefore been considered a secure investment for a long time. Therefore, using gold as security for a loan is a secure choice. When you take a gold loan, you already have an asset you can sell in case you’re unable to pay off the loan.  
2. Easy access to money– A gold loan is akin to an equity investment in terms of ease of access. The process of getting a gold loan is relatively faster. It takes less time than a personal loan. It is so because you’re keeping gold worth the entire value of the loan with the bank.
3. Relatively low-interest rates – Banks’ low interest rates make gold loans quite attractive. Banks usually allow interest rates between 5% and 9% per annum. In comparison, most personal loans come with an interest rate of around 10% or above. 
4. Loan repayment flexibility – The loan term is usually between 6 months and a few years. Unlike other types of loans, gold loans can be repaid in installments.

Why Is Gold Loan in Demand Right Now?

The demand for gold in the country is increasing due to the high inflation rate in the Indian economy. People are therefore buying gold as a store of value. This gold loan demand is also boosted by the strong Indian rupee, which makes gold loans even more attractive. Moreover, the falling prices of crude oil have led to a decrease in the price of gold. This has made gold loans even more attractive. The high inflation rate, low crude oil prices, and increasing demand for gold loans have led to a spike in the price of both gold and the Indian rupee.

Conclusion

Gold loans are one of the oldest forms of collateral. They work on the principle of pawnbroking, and the borrower pledges gold as security for the loan. The lender advances the loan in exchange for the gold. Given that gold loans are often taken for short durations, they can easily improve your credit score. At the same time, it is also a safer way when compared to a personal loan. With gold as collateral, there are limited risks involved for both the borrower and the lender.

If you have any questions about gold loans or credit scores, you can read the detailed blogs available on the Piramal Finance website for detailed answers.