People don’t buy cars every year, nor even every five years. For most buyers, it is a lifetime decision. Whether new or used one, purchasing a car is an expensive matter and that is the reason why buyers choose a car loan.
Though some lenders provide loans for the complete ex-showroom car price, there are lenders who offer auto loans up to 80% of the value of the car. Therefore, before you apply for car loans, it is important you do the groundwork properly.
So, what are the factors that you need to know regarding car loans? You should be clear regarding the loan amount, interest rates, hidden costs, and repayment terms & conditions.
It is also necessary to know what parameters lenders consider while approving a loan application. One of the major factors is the creditworthiness of the loan applicant, which will be clearly revealed from the CIBIL score or credit score.
One more aspect that you should be aware of before even moving forward with the auto loan is the types of car loans as it will vary according to the vehicle you have chosen, the amount of loan you are applying for and the type of collateral you want to mortgage.
What is a CIBIL Score or Credit Score?
A CIBIL score is the numerical representation of the ability of the borrower to repay. A CIBIL score or credit score is a 3-digit number, which falls within the range of 300-900.
When the score is closer to 900, you can get better deals on loans, such as higher loan approval at a lower interest rate. Most of the lenders such as banks and NBFCs preferably look for a credit-worthy person.
CIBIL score range and its implications
Experts quickly understand the creditworthiness of the applicant by seeing the CIBIL score. Different CIBIL scores depict different aspects of a borrower. According to FICO, scores can be divided into 5 grades, 800+ is excellent, 740 to 799 is very good, 670 to 739 is good, 580 to 669 is fair and lower than 580 is poor. However, we have divided into 3 parts:
CIBIL score within this range is considered a pretty good record of the applicant. There are greater chances for borrowers to get a car loan. Banks and NBFCs welcome loan applications from the buyers with this credit score. The car loan process for these buyers happens to be hassle-free and seamless. Moreover, you can negotiate on the loan amount and the interest rate.
This credit score reduces your chance to get a car loan of your credit score falls within this range then the lenders shall evaluate your loan eligibility on other factors including job stability, monthly income, number of loans, etc. However, this will be time-consuming and not smooth and streamlined when the score is less than 750.
A credit score that is less than 600 affects your chances to get a car loan adversely. It reflects a poor debt repayment. The possibilities of getting loan applications rejected are quite high. If a lender agrees to give you a car loan, the loan amount will be low and the interest rate will be high, or the loan will be against collaterals including assets and shares, FDs, gold, etc. In case your loan application is rejected, you should improve the CIBIL score instead of applying for loans with other car loan lenders that will minimize your score further.
Who is a credit-worthy person?
A good credit score of more than 750 indicates that an individual is a credit-conscious or credit-worthy person. Good credit behavior is an indication of good future credit habits. The lenders want to make sure that they are approving loans to people who shall make the loan repayment on time.
How the CIBIL score affects car loans?
A CIBIL Score is an important factor in the car loan application process. You must do your credit score check regularly to keep up to date with the number. The reasons why car lenders check CIBIL score are as follows:
Reflects your credit health
If your credit health is good, you will easily get loan approval or vise-versa. The car loan approval process by financial institutions and banks considers the CIBIL score stated in the CIBIL report as this reflects your credit health that includes credit history, the number of loans, timeliness of the loan repayments, frequency of loan rejections, etc. of the applicant.
Depends on the range
There are certain ranges in the CIBIL score that represent different things about your debt repayment behavior and credit history. The minimum credit score needed for hassle-free and seamless loan approval is 750. If the CIBIL score is lower than that, there are lesser chances to get a car loan.
Decides the interest rate on a car loan
As mentioned above, the lower credit score indulges in having trouble getting a loan. For example, if the CIBIL score is below 600, there is very little chance to get approval on your loan. Even if you get a car loan, the loan shall be against collateral or the terms and conditions of the loan shall be unfavorable. You may even have to pay a much higher interest rate in such situations. On the other hand, a high credit score will not only help you to avail of a loan at a competitive rate of interest but also assist you to negotiate for a better rate of interest.
Decides the amount of the car loan
Just like the car loan interest rate, if the CIBIL score is high, you also have a good position to bargain the loan amount and receive a better deal. The banks often interpret a higher loan amount with a good credit score as quality customers. This will not be the case if the CIBIL score is low.
What are the precautionary measures to improve the car loan eligibility?
Before you apply for a car loan you should know the following:
- Do not use more than 35% of the credit limit so that your CIBIL score is not affected adversely.
- Pay off the dues each month with the due dates rather than paying the minimum outstanding balance. This will prevent the CIBIL score from falling. The banks shall charge a huge interest rate when the balance is carried forward to the next year.
- If you miss out on the debt repayment each month, you can choose an auto-debit facility, which gives the bank the mandate to debit the car loan amount on a specified date each month. Ensure you have a minimum balance in your bank account so that banks do not charge a huge interest rate in case there is insufficient balance in your bank.
- Pay the dues on the existing and credit card loans every month within its due date for improving the CIBIL score. This shall improve your possibility to get a loan.
- Avoid financial behavior such as taking cash withdrawals against the credit card because this will indicate credit hungriness resulting from financial stress.
- Do not be a loan guarantor. In case the primary account holders default to pay dues on time, it shall not just impact your CIBIL score and credit history, but the lending bank might ask you for debt repayment on behalf of the borrower.
- Analyze the credit report and check whether there are omissions or repetitions or any fraudulent transactions. This kind of information reduces your CIBIL score. If you find this kind of information, you should raise a dispute before you apply for a car loan.
- Read al the document carefully so that all your doubts are cleared before finalizing the loan. This will eliminate the possibilities of financial behavior, which may impact your credit score.
What are the quick ways to maintain and improve your CIBIL score?
There are some steps, which can help you get a higher credit score such as the following:
- Pay the dues always on time. Late payments are negatively viewed by lenders.
- Maintain a good credit mix. You should have a healthy mixture of secured as well as unsecured loans. Having a lot of unsecured loans is viewed negatively.
- Keep low balances. Be prudent and do not use a lot of credit and keep a control on your utilization.
- Review the credit history frequently. Monitor the CIBIL Score as well as the CIBIL report for avoiding unpleasant surprises as rejected loan applications.
- Monitor your guaranteed, co-signed, and joint accounts monthly. In guaranteed, cosigned, and jointly held accounts, you are liable for any missed payment. The joint holder’s negligence can impact your ability to accessing credit when you require it.
However, to gain a high CIBIL or credit score takes time and effort, but once you gain a higher CIBIL score, your problem gets solved.
What are the advantages of a high CIBIL score?
A high CIBIL score has several benefits that are discussed below as follows:
- Quicker approval for credit cards and loans
- Cheap car loan interest rates
- Credit cards with a higher credit limit
- Good deals on the credit cards
- Discount on the processing fee and other charges related to loan applications
It is crucial that you check the CIBIL score frequently. Ensure that your score is more than 750 so that you can enjoy better access to car loans. A CIBIL score can help you gain access to loans. Lenders including financial institutions and banks consider the credit score along with other factors.