Getting to drive one’s own vehicle makes life simpler. Also simple are the ways in which one can avail of an auto loan in today’s financial supermarket.
There are a few criteria which one needs to fulfill in order to be able to apply for a car loan – a minimum age of 21 years, a stable and minimum monthly salary and a good credit history. A good credit history is, in many cases, the deciding factor in the sanction or rejection of an auto loan application.
What is a Credit Score?
The score acts a mathematical prediction of one’s capability to pay one’s debts. Calculated from one’s data-rich credit report, the three digit number is studied by lenders to determine one’s creditworthiness for a loan. The lower the credit score, the riskier the lender feels it is to lend an individual money, and the higher interest rate it tends to charge if it is opting to approve one’s loan request at all. A credit score below 560 is usually considered to be a bad one. Having a poor credit score would simply imply that lenders consider an individual to be a high credit risk.
Must Read: How is CIBIL Score calculated?
A credit score is arrived at by applying a complex mathematical algorithm to one’s borrowing and payment patterns. Despite meeting most of the eligibility criteria, a poor credit score can solely cause the rejection of a car loan.
Some of the reasons for a poor credit score are:
- Not paid in full and on time, each month: One of the easiest ways to drown one’s credit record is to delay payments toward one’s credit cards- and if recurred over a period of time- it leads to an aggressive impact on one’s credit score.
- Paying only the minimum amount due: There is no advantage in only paying the minimum amount that is due on one’s credit card since it will only result in further interest and does nothing to improve one’s credit score.
- Cancelling one’s credit card: Cancelling one’s credit card services only brings down one’s available credit limit and pushes up the credit utilisation ratio. A high credit utilisation ratio would only lead to a low credit score.
- Too many inquiries into one’s credit score: Too many car loan applications with multiple lenders within a short span of time reveals a credit hungry behaviour. Lenders do a hard inquiry on one’s credit report to determine approval for one’s car loan application, which lowers one’s credit score.
Must Read: Tips To Improve Your Credit Score
Therefore, it is advisable to check the credit score on one’s own before applying for a car loan. The Credit Information Bureau India Limited (CIBIL), Experian and Equifax- all provide credit reports through the online facility. By doing this, one can know what to expect without having to spend unnecessary time and energy associated with finding out at the loan provider’s office.
Effect of a low credit score on car loan
Though banks and financial institutions never declare the ideal credit score they desire for sanctioning a car loan, it is advisable to have a score above 750. This would ensure a successful approval with optimal interest rates. For those, who don’t have the luxury of having such a perfect credit score, something in the high 600’s would work- but in most cases, will fetch only a high rate of interest. The reason why loan providers are ready to extend a car loan offer to applicants with a not-so-perfect credit score is that car loans are secured with the car so funded serving as collateral. This diminishes the risk that lenders take by sanctioning such loans. Obviously, this does not work up to be the best option for any loanee looking for a car loan approval. There are many rectifying measures that one can take up to improve one’s credit score beforehand- which would directly help fetch better interest rates.