How Does Your Credit Score Affect Your Car Loan?

Nowadays, owning a car is not just a luxury but a necessity for many. Whether it’s for commuting to work, travelling with family, or simply enjoying the freedom of the open road, a car provides convenience and mobility. However, purchasing a car often requires financial assistance, and one of the key factors that can influence your ability to secure a car loan is your CIBIL score. In this blog post, we will delve into what a CIBIL score is and why it holds immense importance when applying for a car loan.

Unveiling the CIBIL Score for Car Loans

The Credit Information Bureau (India) Limited, commonly known as CIBIL, is a credit information company that collects and maintains credit-related information about individuals and businesses. The CIBIL score is a numerical representation of an individual’s creditworthiness, which is calculated based on their credit history, repayment behaviour, outstanding debts, and other financial factors. The score typically ranges from 300 to 900, with a higher score indicating better creditworthiness.

CIBIL Score Range	Description	Car Loan Interest Rate Impact
300 – 499	Poor	Likely to attract higher interest rates or loan denial due to high credit risk
500 – 599	Below Average	Interest rates may be higher, and loan terms less favourable.
600 – 699	Fair	Interest rates might still be relatively higher, but improvement is possible.
700 – 749	Good	Eligible for competitive interest rates and better loan terms
750 – 850	Excellent	Likely to receive the best interest rates and loan terms available.

Why CIBIL Score Matters for Car Loans

When you approach a financial institution or a bank for a car loan, they assess the risk associated with lending you money. Your CIBIL score plays a pivotal role in this assessment process. Here’s why your CIBIL score matters when applying for a car loan:

Loan Approval

A high CIBIL score greatly enhances your chances of loan approval. Banks and financial institutions view a higher score as an indication of responsible financial behaviour and a lower credit risk.

Interest Rates

A good CIBIL score can also result in more favourable interest rates. Lenders often offer lower interest rates to individuals with high credit scores, which can significantly reduce the overall cost of your car loan.

Loan Amount

Your CIBIL score can influence the loan amount you are eligible for. A higher score might enable you to secure a larger loan amount, giving you the flexibility to choose the car that suits your needs.

Negotiating Power

With a strong CIBIL score, you have better negotiating power. You can discuss terms and conditions with lenders from a position of strength, potentially securing better loan terms.

Quick Processing

A good credit score can expedite the loan approval process. Lenders are more likely to trust borrowers with a proven track record of timely repayments, leading to quicker processing times.

CIBIL Score Requirements for Car Loans in India

Here are some of the top car loan providers in India and their respective CIBIL score requirements:

Lender	CIBIL Score Requirement
HDFC	700
ICICI	750
SBI	750
Bajaj Finserv	750
IDFC First Bank	700
Bank of Baroda	701
Union Bank of India	700 or above

How to Get a Car Loan with A Low CIBIL Score?

As you can see, the biggest car loan lenders in India require you to have a minimum CIBIL score of 700. Therefore, getting a car loan with a low CIBIL score can seem challenging; however, don’t worry, it’s not impossible.

Here are some steps you can consider taking to improve your chances of securing a car loan despite having a low credit score:

Improve Your CIBIL Score: While this may not provide an immediate solution, working on improving your credit score is crucial for future financial endeavours. Make timely payments on existing debts, reduce credit card balances, and address any errors in your credit report.

Offer a Larger Down Payment: A larger down payment reduces the overall loan amount, making the loan less risky for the lender. It might improve your chances of approval and potentially lead to better terms.

Provide Collateral or Co-Signer: Offering collateral (like another valuable asset) or having a co-signer with a good credit history can act as a form of security for the lender. It might increase your chances of approval and lead to better loan terms.

Opt for Smaller Loan Amounts: Applying for a loan for a more affordable car might increase your chances of approval. Smaller loan amounts are seen as less risky.

Negotiate Terms: Even if you secure a loan with a low credit score, the terms might not be favourable. Negotiate with lenders to see if there’s room for improvement, such as interest rates or repayment periods.

Consider Credit Unions: Credit unions often have more lenient lending criteria compared to traditional banks. They might consider your overall financial situation rather than just your credit score.

Conclusion

Your CIBIL score is a reflection of your financial discipline and history. When seeking a car loan, it can make the difference between a smooth, affordable borrowing experience and a challenging one. By maintaining a good credit score, you not only increase your chances of loan approval but also gain access to better terms and rates, ultimately helping you achieve your dream of owning a car with greater ease and financial confidence.

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.