Friday, 20 April 2018

Gold Loan Interest Rates Depends On Credit Score?


Ankita is a housewife who plans to start her own business and for that she is planning on taking a loan. She is faced with a hurdle; she has no credit history since she has no credit cards or loans in her name. She was disappointed but her banker friend suggested that she consider taking a Gold Loan. Ankita heeded to the advice offered to her friend and was able to kick start her business venture.
What are Gold Loans?
A gold loan is a loan that is sanctioned against gold as collateral. Thus the applicant can pledge jewelry; ornaments or gold in any other form and the lender will sanction a loan based on the value of the loan offered as collateral and also the loan to value ratio which has been fixed by the RBI and at 75%. Thus the applicant can get a loan up to 75% of the gold that is given as collateral. Getting a gold loan is fairly easy as documentation for it is simple; disbursal is fairly fast; some lenders may lay down minimum income criteria while others may not. Thus these loans are often simple and quick to procure when compared to other loans and can offer financial assistance in the time of a crisis.
Gold loans and Credit Score: How are they Related?
Often people with no credit history or low credit score prefer to seek a gold loan. Many lenders may agree to sanction a loan to the applicant without seeking their credit report or even if they have a low CIBIL Score.  The reason for this is that liquidating gold (in case the borrower defaults) is much simpler that trying to sell a car or a home in case of a car loan default or home loan default by the borrower. Thus the lender is assured of the safety of their funds and may be willing to lend to those who have no credit score or a low score too!
Often gold loan thus is a choice for those without a credit history or no credit history. Generally interest on loans (mostly) are affected by the credit history, lenders may be willing to offer loans at lower rates to those who have a good credit score as the lender in this case assumes a lower risk and for those who have a low score the interest rates on loans may go up but this is not the case when it comes to gold loans. As stated above most lenders do not even seek the credit report when an applicant applies for a gold loan, which is usually the first step in most other loans. If the lender finds the credit health of the applicant satisfactory then only they go to the next step when scrutinizing applications for home, auto, personal loans and so on.
Interest on gold loans is of course dependent on the market conditions, the lender’s policy and one more factor, the LTV ratio. Though the RBI fixes the upper limit for the LTV ratio lenders can choose to offer loans at a lower ratio too. So when the loan is offered at a lower ratio then the lender may be willing to extend the loan at a lower interest rate as compared to when the LTV ratio is higher. So if the value of the gold offered is Rs. 50,000 then loan value can go up to Rs. 37,500 but if the applicant needs or agrees for a loans of a lower amount, say Rs. 30,000 the lender may be willing to offer a loan at concessional rate. Thus unlike in the case of other loans, gold loan rates or their sanction is not dependent on the credit score but the LTV ratio may impact the interest rate.

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