What a car loan means for your credit score?

6 MinsDec 6, 2021

Amrita Rathore is planning to buy a new car. She is, however, worried that doing so might adversely affect her credit score. She doesn't want that to happen because she is planning to buy a house in five years, for which she will have to take a big-ticket home loan. But is her fear valid? Let us help Amrita understand the impact of a car loan on her credit score. 

affects your credit score

How are credit scores decided? Credit bureaus like CIBIL base their credit score on five parameters – payment history, the amount owed, length of credit history, credit mix and new credit.

  • Payment history: This has the highest weightage – typically 35%. Therefore, an individual who has a 100% record of on-time payments naturally scores high on this parameter.
  • Amount owed: This criterion is generally given a weightage of 30%. This is the ratio of debt that an individual has piled up to her total annual income. The lower this ratio, the better it is.
  • Length of credit history: This parameter generally carries a 15% weightage and is based on how long a person has been borrowing and repaying. An extended history is considered to be better.
  • Credit mix: This criterion which generally is given a 10% weightage, looks at the kinds of debt a person has – credit cards, personal loans, auto loans and so on.
  • New credit: This parameter with a 10% weightage looks at how many new loans is an individual applying for.

How does a car loan affect credit score?

Based on this Amrita understood that her credit score would take a temporary hit on a few parameters when she applied for a car loan.

However, she shouldn’t let that bother her too much. If she is a good borrower and pays her car loan EMI (Equated Monthly Instalment) on time, in the long term, it will benefit her credit score.

[Also Read: Buying Your Car is Easier Than Ever, With These Auto Loan Products]

If she has a spotless repayment record over time, she will score higher on the 'Payment History' parameter. Similarly, with such a repayment record and assuming she is opting for a car loan for a 3-5 tenure, she will also score higher on the 'Length of Credit History' parameter.

While she may owe a higher amount at the start of the loan when she buys her new car, as she keeps on repaying the debt on time, this will come down and help her on the ‘Total Amount Owed’ criterion.

Ideally, if Amrita keeps other credit, such as credit card spending and personal loans within limits, taking a new car loan and repaying on time will help enhance her credit score. 

Axis Bank offers loans for new as well as used cars at attractive interest rates and flexible tenures. For new vehicles, it provides loans for up to 100% of the on-road costs. The tenure for a Car Loan can be as long as seven years. Additionally, it has tie-ups with several manufacturers, leading to exclusive benefits for its customers.

Axis Bank Used Car Loans offers up to 85% of the valuation amount. It also offers complete support for the transfer of ownership through its pan-India tie-ups with dealers.

For both the loans, customers can apply online either through the Axis Bank mobile app or internet banking.

Get more details on Axis Bank New Car Loans and Used Car Loans online.

Disclaimer: The Source, a content creation and curation firm, has authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source 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.