Your credit score plays a highly important role when it comes to applying for a Car Loan. It reflects your creditworthiness and financial discipline. Banks and other financial institutions base their interest rates and willingness to give a loan depending on your credit history and score.
In this blog, we will explore the relationship between credit scores and Car Loan interest rates, helping you secure a better loan term and save money in the long run.
What is a credit score?
A credit score is a three-digit number that rates your credit history. It typically ranges between 300 to 900 and is calculated by authorised credit bureaus like CIBIL. Your credit score is calculated on the grounds of:
- Payment history
- Types of credit used
- Length of credit history
- Recent credit inquiries
- Credit utilisation ratio
A person with a higher credit score exudes more financial reliability than someone with a lower credit score.
How does your credit score impact your Car Loan Interest Rate?
- Determines loan eligibility: Your CBIL score acts as an insight for the lender to determine your capability and sincerity in paying back the amount taken. A higher score gives you a better chance of approval than a lower one.
- Affects Car Loan interest rates: Your credit score highly affects the interest rate at which the bank provides you the loan. A good credit score will provide you with the best interest rates as the bank views you as a low-risk borrower. This reduces the burden of your monthly EMIs.
A lower credit score gets your highest Car Loan interest rates. Often, lenders refuse to accept people with poor credit scores.
- Impacts loan terms: Your credit score impacts your Car Loan interest rate and the term of your loan. This includes the down payment, the loan amount and even the tenure for which they are willing to offer it.
Borrowers with a higher credit score can get a higher loan amount by paying a minimum down payment for a longer period. This flexibility, however, keeps getting limited lower credit scores.
Why is it Important to maintain a good credit score?
Your credit score highly affects your Car Loan interest rate. A lower interest rate means fewer monthly EMIs, which eventually means a lower interest outgo. However, the interest rate keeps increasing due to your poor credit score.
By maintaining a good CBIL score, you can minimise the financial burden on yourself and enjoy a more flexible loan term. Having a good credit score also allows you the freedom to customise your loan terms to align with your interests.
Tips to improve your credit score for better Car Loan Interest Rates
Listed below are some tips that you can employ to get better Car Loan interest rates:
- Know your CBIL score by checking your CBIL report.
- Go through your reports and spot if there are any areas of shortcomings.
- Never apply for numerous Credit Cards in short intervals.
- Settle all your pending Credit Card dues.
- Make it a habit to pay your EMIs and credit bills on time.
- Pay off all your defaulted payments.
- Try spending only 30% of your Credit Card limit, as it helps boost your credit score.
Conclusion
Your credit score plays a crucial role in determining the Car Loan interest rates and terms. With careful planning, you will be well on your way to driving your dream car while keeping your finances in check.
