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Finding your way to a Car Loan with low CIBIL score

3 min read Mar 12, 2024

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Obtaining a Car Loan with a low CIBIL score might seem like navigating through a thick fog. Yet, with the right knowledge and steps, you can clear the path to financing your dream car.

What is a credit score?

A credit score is a financial indicator that lenders use to evaluate the risk of lending money to individuals. It reflects your history with credit, including loans, credit cards, and other forms of credit. Scores range from 300, indicating a high risk to lenders, to 900, which signals low risk. A low CIBIL score can make it challenging to secure a Car Loan, but understanding this metric is the first step towards improvement.

How do you improve credit score for your Car Loan?

Enhancing your credit score is essential for better loan terms and interest rates.

  • To maintain a healthy credit score, always pay your loan EMI and Credit Card bills on or before the due date.
  • Strike a balance between secured loans like Car or Home Loans and unsecured Personal Loans.
  • Partially prepay your loans when possible, but avoid closing them before the term ends to demonstrate creditworthiness.
  • Apply for one loan at a time to prevent multiple hard enquiries that can lower your credit score.
  • Regularly review your credit report for accuracy and report any discrepancies to credit bureaus like Experian, EQUIFAX, or CIBIL.
  • Keep your credit utilisation under 30% of your credit limit to manage your spending efficiently.

Tips to get a Car Loan with a low credit score

With strategic planning and a thorough understanding of the lending process, you can improve your chances of getting a Car Loan with a low CIBIL score. Here are practical steps to take:

Check your Car Loan eligibility
Before diving into the application process, verify your qualifications for a low CIBIL Car Loan. Lenders assess various factors, such as your income, employment history, and existing debts.

Obtaining a detailed credit report and improving any negative points can enhance your eligibility.

Check the interest rate of Car Loan
The interest rate on your Car Loan will significantly affect the overall cost of borrowing. Lenders often vary rates widely, and your credit score typically influences them, with lower scores usually resulting in higher rates. By researching and comparing the interest rates offered by different financial institutions, you can identify the most cost-effective option available to you. Some lenders specialise in loans for individuals with lower credit scores and may offer more competitive rates for these borrowers.

Don't apply for multiple loans in a short time
Every time you apply for a loan, the lender performs a hard inquiry on your credit report, which can temporarily lower your credit score. Applying for several loans in a short period can compound this effect, making you appear desperate for credit and potentially lowering your score even further. To avoid this, only apply for loans when you genuinely need them and consider using lender pre-qualification tools where available.

Borrow according to your repayment capacity
Before applying for a Car Loan, examine your finances to determine how much you can realistically afford to borrow. This involves considering your income, expenses, and other financial obligations to ensure that you can comfortably manage the loan repayments. Lenders will assess your debt-to-income ratio as part of the application process, and borrowers who appear overextended are less likely to be approved.

Opt for a model of car that fits your budget
The type of car you choose to purchase can also influence your loan application's success. Opting for a more affordable car reduces the amount you need to borrow, lowering the lender's risk and potentially leading to more favourable loan terms. Additionally, some lenders may restrict financing for certain types of vehicles, such as older models or those with high mileage, so choosing a car that fits within the lender's guidelines can further enhance your approval chances.

Read the documents carefully
Once you've received a loan offer, it's crucial to read through the agreement carefully before signing. This ensures that you fully understand the terms and conditions, including the interest rate, fees, repayment schedule, and any penalties for late payments or early payoff.

Loan against car
If you already own a vehicle outright, you might consider securing a loan against it. This type of loan, often referred to as a title loan, can offer more attractive terms because the lender has the security of the car as collateral. While this can increase your chances of approval and result in a lower interest rate, it's important to proceed cautiously. You must make the repayments to avoid losing your vehicle.

Minimum CIBIL score required for a Car Loan

A CIBIL score exceeding 600 is deemed satisfactory, but lenders often prefer a score of 750 or more. A higher CIBIL score, significantly above 750, substantially increases the likelihood of lenders sanctioning your Car Loan, but there isn't an absolute minimum CIBIL score required for a Car Loan. Nonetheless, presenting a higher credit score is always advantageous, potentially leading to more favourable loan terms.

Why is the CIBIL score important for a Car Loan?

CIBIL score indicates creditworthiness, which can impact the loan amount you're eligible for.

A high score may lead to approval for a larger amount, whereas a lower score may limit this. Additionally, your CIBIL score plays a crucial role in the lender's decision to approve or reject your Car Loan application, as it reflects your past repayment behaviours.

Furthermore, your score can affect the interest rate offered; a higher score could secure lower rates, reflecting responsible financial behaviour. Conversely, a lower score could result in less favourable terms, such as higher interest rates and down payments.

Aslo Read Affording your dream car: A guide to luxury Car Loans

Conclusion

While securing an Auto Loan with a low credit score can be challenging, it's within reach with careful planning and the right approach.

If you're looking to purchase a new vehicle, consider Axis Bank's New Car Loan which offers up to 100% on-road funding starting from ₹1 lakh, competitive interest rates, and rewards points. With the minimum loan amount set at ₹1,00,000 and special benefits for priority banking customers, Axis Bank could help turn the dream of your new car into a reality.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.