How Does a Low CIBIL Score Affect a Car Loan?

A low CIBIL Score may negatively affect your car loan approval. It will also have a bad impact on the car loan amount, interest rate, and flexibility of tenure. Besides these things, a low CIBIL score may leave a not-so-impressive image of your creditworthiness. Checking your CIBIL Report is the first step the bank follows while processing any car loan in India. It is through the CIBIL Report and score that the bank gets to know about the financial discipline, a record of debt repayment, financial strength, and credibility of the applicant.

A CIR (Credit Information Report) helps the bank to decide on granting a loan to the applicant, fixing the rate of interest and quantum of loan to be financed. Apart from the CIBIL Report, the bank needs to analyze the present financial position of the applicant through the income proofs such as ITRs and salary slips, which enables the bank to make a qualitative decision on lending to a person.

The CIBIL Score ranges between 300 and 900. A score above 750 is considered to be the best and below 650 is considered the worst; any number in between is average. In this post, we will discuss the impact of a low CIBIL Score on a car loan, steps to boost your credit score, and frequently asked questions.

Impact of a Low CIBIL Score on Your Car Loan

CIBIL Score has various impacts on the car loan application of the customer which are discussed as below:

The Creditworthiness of the Applicant: It is through the CIBIL Report that the lender (bank or financial institution) gets to know about the creditworthiness of the applicant as the CIR helps the lender to analyze the past dealing of the customer with other banks and the track record of repayment in the different accounts can also be seen in the report.
Based on the CIBIL Report, the bank can analyze the pros and cons of lending to a person as the previous repayment history of up to 36 months is reflected in the CIR. A low CIBIL Score means the applicant is not financially credible and the bank can reject the loan application submitted by such a customer.
The Decision of Loan: The bank has the right to reject your car loan application if it observes that the previous repayment record of the applicant is not up to the mark. Any default made by the borrower in all the loans availed by him/ her is reflected in the CIR which makes it easy for the bank to decide if the loan is to be sanctioned or not.
CIBIL score above 750 has the highest chances of approval of car loan, whereas the average score (650-749) is also approved with proper due diligence by the bank along with a higher rate of interest. The lower CIBIL Score (below 650) may lead to rejection of the car loan application as the applicant is more likely to make a default on future loans.
Interest Rate: Banks charge different rates of return from the applicants with different CIBIL score categories. An applicant with a high CIBIL Score (Above 750) is given concession in interest rate by the sanctioning authority, whereas the applicants with average score (650-749) are not provided with such concession and a normal rate of interest is charged by such category of applicants. The applicants with a lower CIBIL Score (Below 650) are generally charged with a very high rate of return which can be up to 4% higher than the normal rate of interest.
Loan Amount: The quantum of loan to be financed to an applicant depends upon his/ her creditworthiness. The bank extracts a CIR before consideration of the loan and based on the report, the bank decides the amount of the loan. The bank can finance up to 100% of the ex-showroom price of the vehicle for applicants with a CIBIL score of more than 750 (in some cases the bank finances 100% of the on-road price of the vehicle, where there is a tie-up arrangement of the bank with the car company).
The bank generally plays conservative in loan applications with an average CIBIL score and asks for up to 25% margin for the purchase of a car. In applications where the CIBIL Score is below 650, the bank generally asks for higher down-payment (treated as margin) and a lower amount is financed by the bank in such cases.

Steps to Follow If You Have a Low CIBIL Score

Approach the bank with your income proofs such as ITRs, salary slips, etc., to convince the bank that you have a regular source of income to repay the car loan.
If the CIBIL Score is low due to some erroneous reporting of the loan, the same should be reported to the bureau immediately so that it can be rectified before the bank decides on a car loan request.
Don’t apply for a car loan with different banks at the same time. Every CIBIL inquiry is reported in the system and too much of such inquiries may raise doubt in the minds of bank officials which may lead to rejection of your car loan proposal.
Try paying off the irregular amount, if any.
Make payments to the banks on time to better your CIBIL Score.

Frequently Asked Questions about Low CIBIL Score Car Loan

Here are the FAQs:

1. Can You Get a Car Loan with a Low Credit Score?

People with high CIBIL scores and good credit history have a better chance of landing a car loan. While those with a less satisfactory credit history may think they are not eligible for a car loan, they can steadily work to improve their financial behavior to reach an optimum credit score needed to get a loan to purchase vehicles.

2. Why Keep a Check on Your CIBIL Score?

Most of the banks accept a CIBIL score of 750 for granting a car loan. Keeping this in mind, one can hope to be capable enough to buy their dream car. Start with checking your credit report for observing your repayment journey. Check your CIBIL score and strategize a plan to figure out how you can improve your CIBIL score.

3. Why Pay Your EMIs Regularly?

Boosting your credit score can take some time if you have any outstanding loans and EMIs to pay. Your CIBIL score can be seriously affected if irregular payments or a delay in payment towards loans and credit cards is made. A good CIBIL score attracts better interest rates, thus resulting in helping you pay off your loan in a shorter period or at a lower interest rate.

4. Do Credit Report Errors Lower CIBIL Score?

Note the errors in your credit report and try to fix them as soon as possible to increase the chances of you obtaining a car loan. Some errors in the report can lower your score drastically. An inquiry on your file is created every time the lender accesses your credit report. Thus, make sure to avoid applying at every financial institution all at once for credit.

5. Which Documents May the Lender Need for a Car Loan Approval on Low CIBIL Score?

Documents like the salary slips can authenticate that you have a stable job, which can work in your favor when you approach a lender for a car loan. In addition, other document proofs such as your electricity and water bills tell that you make regular payments and can help you gain a chance at securing the loan on the car.