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Tata Capital > Blog > Loan for Vehicle > How does Credit Score Impact Car Loan Interest Rate?

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How does Credit Score Impact Car Loan Interest Rate?

How does Credit Score Impact Car Loan Interest Rate?

Call it status, call it a necessity or call it a mere convenience – owning a car can be found in the bucket list of most of us! But, at the same time, buying a car is an expensive matter too. Hence, most car buyers opt to avail car loans to fulfill their dreams of owning a car. A car loan or an auto loan is a loan taken from a bank or a non-banking finance company to purchase a car – new or pre-owned - that could range from a small car to an SUV or an MUV. There are two types of car loans – new car loan and used car loan. As the terms indicate, a new car loan is specifically for car buyers who are opting to buy a brand new car whereas a used car loans for buyers who opt to buy a pre-owned car. And, presently, both the types of car loans are almost equally popular. Alike other loans, a car loan also has its salient features and terms and conditions. The primary aspects such as tenure of a car loan, car loan interest rate, amount of down payment, and eligibility criterions are common for both the types of loans, of course, with a slight variation.

Like any other loans such as home loans, personal loans etc., car loans also have eligibility criterions, that becomes the deciding factor for approval or rejection of a loan application. The borrower’s source of income, age, loan to value ratio, mandatory documents, type of car – new or old, and credit score are commonly considered as important eligibility factors. A borrower has sanctioned the required loan only when he is able to meet these eligibility criterions. Among these, credit score plays a very significant part in the entire process of availing a loan. This is true for any kind of loan – be it a home loan or a car loan. A credit score can impact not only the approval of a loan but also the interest rate. Let’s have a look at how a credit score can impact your car loan interest rate.

It is often seen that lenders check your credit score before sanctioning the loan. To get the best car loan interest rate, it is advised that you must ensure of having an excellent credit score, minimal debt, and sizeable down payment. These factors indicate the lender that you are not a risky borrower and this can lead to you closing in on a low-interest rate. The simple math to calculate the relationship of credit score and interest rate is – if your credit score is high, there are better chances of availing a lower car loan interest rate, and if your credit score is low then there is a lesser chance of negotiating on the rate of interest.

Though the rate of interest may differ from bank to bank, it is generally observed that a credit score of 700 and above is considered an excellent score. "It typically takes about four to six months for someone with a credit score of 650 to reach a score of 750-plus. If you are at 500-550, it will take about 8-12 months," says RanjitPunja, CEO, CreditMantri. (Source:, the interest rate concession that can be availed depends on the particular bank or lender from where you are availing the car loan. Most of the credit reports and credit scores are calculated based on five key financial elements i.e. timely payment of your bills, debts owed in terms of loans, credit cards etc., credit history, how many new credit accounts you hold, and the types of credit you have. So, keeping a tab on your credit score and maintaining a good score can indeed help you strike a good car loan interest rate. Well then, get your dream car at an interest rate that will be easy in your pocket with the help of your credit score!

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