If you are planning to take out a car loan, it is important to have a good credit score. Your credit score for a car loan is a measure of your creditworthiness and is used by lenders to determine your risk as a borrower. If you have a good credit score required for a car loan, it will be easier for you to get approved, and you may even get a lower interest rate. Whereas, it is challenging to get approved for a car loan with low CIBIL scores.
In this blog, we will discuss why a credit score for a car loan is important, the impact of a good or bad credit score on a car loan, whether you can get a car loan with low CIBIL scores, and ways to improve your credit score for a car loan in India.
What is a credit score?
Your credit score is a three-digit number that represents your creditworthiness to lenders. It is calculated based on various factors such as your payment history, credit utilisation, credit history length, and the types of credit you have. A high credit score can help you qualify for a car loan with better terms and lower interest rates, whereas a car loan with a low CIBIL score can make it difficult to get approved or result in higher costs.
How is it calculated?
In India, the credit score is calculated based on the Credit Information Report (CIR) which is generated by the Credit Information Bureau (India) Limited (CIBIL). The CIR is based on an individual’s credit history and is used by financial institutions and banks to evaluate creditworthiness.
The CIR takes into account the following factors:
- Payment history: This looks at whether you have made your payments on time. Late or missed payments can negatively impact your score, while a history of on-time payments can boost it.
- Credit utilisation: This looks at how much of your available credit you are using. High balances on your credit cards, for example, can indicate that you are overextending yourself and may be a high-risk individual.
- Credit history length: This looks at how long you have had credit. A longer credit history can demonstrate to lenders that you are a responsible borrower.
- Credit mix: This looks at the different types of credit you have, such as credit cards, loans, and mortgages. A mix of different types of credit can demonstrate to lenders that you can handle different types of credit responsibly.
- New credit: This looks at how many new credit accounts you have recently opened. Opening too many new accounts at once can indicate that you are taking on too much debt and may be a higher risk.
CIBIL scores range between 300-900, and the higher the score, the better the creditworthiness. A score of 750 and above is considered to be a good credit score.
A minimum credit score for a car loan is 600, which is what most financial institutions will look at. You will not be approved for a car loan with low CIBIL scores. It’s important to note that the CIBIL score is just one factor that financial institutions consider when evaluating a loan application. Other factors such as income, employment, and collateral may also be considered.
Factors reducing and improving credit score
A few ways you can improve your credit score for a car loan in India, and some factors that reduce your credit score are:
- Make all of your payments on time: This is the most important factor that affects your credit score. Late or missed payments can significantly lower your credit score and make it harder for you to get approved for a car loan. Make sure to pay all of your bills, including credit card bills, on time to avoid late payment fees and to get the minimum credit score for a car loan.
- Keep your credit utilisation low: Your credit utilisation refers to the amount of credit you are using compared to your credit limit. For example, if you have a credit card with a limit of Rs. 100,000 and you have a balance of Rs. 30,000, your credit utilization is 30%. It is a good idea to keep your credit utilisation below 30% to improve your credit score. This shows lenders that you are using credit responsibly and not maxing out your credit cards. This is helpful when you apply for other loans like a car loan, personal loan or home loan.
- Check your credit report for errors: Review your credit report regularly and report any errors you find to the credit bureau. Mistakes on your credit report can lower your credit score and make it harder for you to get approved for a car loan. You can request a free copy of your credit report from the credit bureau once a year.
- Diversify your credit: Having a mix of different types of credit, such as a mortgage, car loan, and credit card, can improve your credit score. This is because it shows lenders that you can manage different types of credit responsibly.
- Avoid applying for new credit unnecessarily: Every time you apply for new credit, it can harm your credit score. This is because the lender will do a hard enquiry on your credit report, which can lower your score. Only apply for new credit when you really need it and try to avoid applying for too much credit at once.
- Pay off your debt: High levels of debt can lower your credit score and make it harder for you to get approved for a car loan. Try to pay off as much of your debt as possible, starting with the debts that have the highest interest rates. This will not only improve your credit score, but it will also save you money in the long run.
By following these tips, you can improve your credit score and increase your chances of getting approved for a car loan. It may take some time and effort, but a good credit score can have many benefits and is worth the investment.
Having a good credit score is important if you want to take out a car loan. It can make it easier for you to get approved and may also result in a lower interest rate. By making all of your payments on time, keeping your credit utilisation low, checking your credit report for errors, and diversifying your credit, you can improve your credit score and increase your chances of getting a car loan.