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Credit Scores for Car Loans


Buying a new car is perhaps the most fulfilling experience after you have become financially independent. The thought of having to drive your own new vehicle is very satisfying. After you have done your research and zeroed down on the model and colour you want the next step is to get the car financed. You need not wait till you’ve saved enough money to buy a car. Auto loans give you a chance to ride your own car and fulfil your dream. You can take a loan to pay for your car today and then pay it back over a period of time in instalments. As the buyer’s market is taking prominence, there are numerous car loan options to choose from.


In order to avail for a car loan you need to fulfil some basic eligibility criteria like a minimum age of 21 years, minimum monthly salary and a good credit history. While most prospective borrowers fulfil the first two criteria’s, credit history is what holds them back.


Before sanctioning a car loan, banks check your CIBIL score to understand the risk factor involved in lending you money. The CIBIL score has in fact taken the centre stage for any kind of loan today. This score is calculated by the Credit Bureau to determine the credit worthiness of an individual. On the basis of information provided by the member banks and financial institutions, it maintains a database of an individual’s borrowings and payments patterns.  Many factors like the length of the credit history, credit utilization percentage, repayment patterns and type of loans taken paint the financial picture of an individual.


The CIBIL score ranges from 300 to 900. The strength of the CIBIL score will determine the likelihood of approval and the interest premium you pay. Though banks do not publish the minimum credit score that is needed to ensure an approval, it is advisable to have a score of more than 750. Such an excellent CIBIL score stands a good chance of approval and fetches a low interest rate on the car loans (3%-4%). It helps you qualify for better terms and conditions.


Since car loans are secured loans where the funded car serves as a collateral, banks very often bend the rules and sanction approvals even if the credit score is a little less than perfect. So you may even get a loan approval for a score of around 650 but you will have to pay a very high interest rate which may go upto 20%. Hence a high credit score helps you save a lot of money on interest rates.


If your score is less than 650 you may have to face some rough times in finding a lender who considers factors beyond the credit score to offers loans.


It is advisable to check your CIBIL score and free CIBIL report online as soon as you think of buying a car. This should be the first point on your to-do list, even before you research on different models, take test drives or finalize the deal. Ideally it should be done a few months before you file an application for auto loan. Reviewing your CIBIL score will give you a clear picture of where you stand financially. You can predict the interest rate that you will qualify for and know what to expect when you approach the banks. If your credit score is really bad, you will have time to rebuild your credit history. You can take systematic measures to improve your credit score before applying a loan. If you prioritize your financial goals and start making payments on time you are sure to see some improvement in the score. Also if your CIBIL report has discrepancies that are lowering your credit score, you will have sufficient time to get it corrected. So plan well ahead of time. After all you do not want to pay a higher rate of interest just because your banks didn’t update the bureau with correct information.


Knowing what your CIBIL score is and how it affects the car loans will help you cross the hurdles that come in the way of possessing your dream car.