Car loans are the most opted method to purchase a car where the lender lends some money to the borrower and the buyer must return the money in monthly instalments (EMI) with a specific interest rate over a particular period. Our credit scores are one of the most critical factors in deciding whether the lender should give us a loan.
What is a credit score?
A CIBIL score or credit score is a three-digit number that shows our stand on our creditworthiness to avail a loan. The score ranges between 300 and 900. The credit score depends on several factors such as payment history, how much we owe, length of the credit history, types of accounts we hold, and recent credit activity.
Good Credit Score
A good credit score ranges from 650 to 900 wherein we pay the bills right on time and do have a pending history of loans left. The banks or other money lenders will offer the lowest interest rate and low downpayment for those with a good credit score as they have the lowest chance of becoming a defaulter. So, if we have a good credit score we can go ahead and apply for a loan if we meet the following criteria:
- i) Minimum age is 21 years and the maximum age is 65 years.
- ii) For any car model, an individual's annual income should be 2 lakhs and above.
iii) Those in the service sector must have a minimum of 2 years of work experience.
- iv) Self-employed individuals need to have a year of working experience in their field.
Bad Credit Score
Any score between 300 to 550 becomes a bad credit score and it is crucial for us to improve our scores as availing of a loan from an authorised bank becomes strenuous. There are a few methods we can try to improve our scores:
- Customising the credit card limit. If you’re a spendthrift, it is better to have a lower limit as it restricts expenditure.
- Set reminders to pay the bills on time, this ensures we do not cross the due date.
- Maintain the older credit cars to lengthen the credit history.
- Opt for tenures that allow smaller EMIs to avoid owing money.
- Only take debts within your repaying capacity.
Loans with Bad Credit Scores
Though banks would not authorise loans for bad credit scores, there are a few tips to try in case we require some money:
- Try to improve your credit score before car shopping. Though it might sound silly under this section, it is the easiest way to avail a loan. Given above are a few ways to improve a bad credit score.
- Shopping Online- Online loans are not as scrutinized as taking a loan offline from banks. So with a poor score, one can try to borrow from online money lenders.
- Build a good relationship with your local bank manager as they might aid in approving a loan. Moreover, they might suggest some loan options with lower interest rates.
- Reduce the budget of your car or choose a vehicle that fits your budget. This ensures we do not borrow too much and end up in debt.
- Volunteer to make a higher downpayment. Though this might not be the best solution, if push comes to shove this idea can be given a shot. Although, it is better to be prepared with huge money as a downpayment.
- Apply for pre-approved loans from your bank. Some banks offer pre-approved loans to existing customers based on their KYC paperwork. This increases the chances of loans even with a bad credit score.
- If you’re looking to change your car frequently, leasing a car can be a better option than buying a car. The lease payments are comparatively lower.
- Bring a co-signer to vouch for you. While this might not be an option for banks, private money lenders might consider a trusted co-signer and can assign a loan. But ensure that the EMIs are paid on time so that the co-signer does not land in trouble.
- Do not take a loan for enhancing or fitting extras onto your car. Just use the borrowed money to buy it and use your savings for the extras.
These tips can be tried to see if a lender gives you a loan despite a bad credit score, nevertheless, it is always better to maintain a good credit score and get loans with lesser down payment and low-interest rates.
Happy and Fun learning!