Buying your own car is a dream come true for many individuals be it a compact car, a sedan, a SUV or a MUV. Talking about buying cars, one is inadvertently drawn to the finance aspect because not many of us can afford to pay the entire value of the car out from our own pockets. This is where Auto Loan providers come into picture as they provide easy finance to enable you to buy that car which you have been drooling on whenever you pass its showroom. Before doling out a loan, financial institutions check the individual’s credibility of paying back the loan with the applicable interest. The loan is issued only after the provider is satisfied.
One such credibility check is your credit score which is measured by Credit Information Bureau Limited (CIBIL), a bureau dedicated in determining the credit standing of an individual in context of debts and loans. To know how credit score influences your loan application, you first need to know how the score is calculated. There are five factors that determine your score and each factor gives a particular weightage to the total score calculated.
Let us look at each factor in detail and relate its impact on your car loan.
- Repayment History: a very simple and pertinent factor. When you avail a loan you are supposed to make timely EMI payments. If you are zealous in repaying your debts, needless to say, you will have a good credit score and any default in repayment would bring down your score. With a 35% weightage, it sure is a primary component in determining the score.
- Credit utilization: in simple terms, credit utilization means the quantum of credit utilized by you against the credit limit provided by the loan providers. For instance, credit limit sanctioned to you is 1 lakh while you have availed credit of Rs.20, 000, resulting in the credit utilization ratio of 20%. A higher ratio is considered risky thus affecting your score adversely. So when considering availing a car loan, do check your available credit limit and your current credit utilization ratio before applying.
- Debt Tenure: This factor measures the time period for which you have been availing credit from the market, be it via credit cards, home loan, personal loan, etc. Having other loans or availing a car loan for a longer duration and making timely payments will sure reflect positively on your score.
- New Credit Inquiry: whenever you apply for any type of loan or credit card, the financial institution always checks the credit score to determine your credibility and repayment history. Having multiple loans will entail multiple enquiries which is considered bad for your score. So, when you apply for a car loan, check the other types of credit already availed by you and only then make your decision.
- Credit Mix: surprising as it may sound, the type of credit in your portfolio also has a bearing on your score. Unsecured loans, such as your credit card or personal loan, are considered bad but secured loans such as home or car loan are considered good. So when you avail a car loan, it is a secured loan thus having a positive effect on your credit score.
Now that you know which factors play a role in the approval of your car loan application, do ensure you are on their positive side before applying.