The thrill of owning your dream bike or scooter is an aspiration for many two-wheeler enthusiasts. However, buying a two-wheeler can dent your savings. This is where two-wheeler loans come in handy. They allow you to own your desired vehicle without paying the full amount upfront. But getting approval for a two-wheeler loan is not always easy, especially if you have a poor credit score. So, why is it important to have a good credit score? A good credit score to apply for a two-wheeler loan is important because it demonstrates your creditworthiness and improves the chances of loan approval.
This blog will discuss the importance of a good credit score to apply for a two-wheeler loan. We will examine how your credit score impacts your loan eligibility, the interest rates you get, and tips to build your credit score. Read on to make your two-wheeler loan application smooth and hassle-free.
How Credit Score Impacts Two Wheeler Loan Approval
Financial institutions check your credit score and credit report to gauge your creditworthiness before approving a two-wheeler loan. Your credit score gives the banks or NBFC an idea of how responsibly you have managed credit in the past and how likely you are to repay future loans on time.
Here is why it is important to maintain a good credit history.
Eligibility
Most banks and financial institutions have a minimum credit score requirement for two-wheeler loans. This cutoff is usually 600* to 650*. Your application may get rejected if your credit score is lower than the lender's minimum threshold.
Interest rates
Higher credit scores attract lower interest rates. With a score above 750*, you can expect to get the lowest interest rates on two-wheeler loans. As scores go down, interest rates move up. Poor scores below 600* may get you higher interest rates, making the loan more expensive.
Loan amount
Financial institutions often approve higher two-wheeler loan amounts for applicants with excellent credit scores, up to the maximum amount the borrower qualifies for based on eligibility criteria. However, the approved loan amount is usually much smaller than requested.
Down payment
The specific size of the down payment required for a two-wheeler loan application can vary considerably in inverse proportion to your credit score. Therefore, higher credit scores allow for a lower down payment amount.
Loan approval
Two-wheeler loan applicants who have demonstrated a history of good credit scores have a much higher probability of getting their loan application approved by financial institutions compared to those with low credit scores, who, unfortunately, often get rejected.
Role Of Credit Score In Two-Wheeler Loan Process
While applying for a two-wheeler loan, the bank/NBFC will check factors like your income, job stability, debt levels, etc. However, your credit report and score play a pivotal role as they reflect your past borrowing behaviour.
Financial institutions will evaluate information in your credit report like:
- Payment History: Late payments on past loans or credit accounts will show up in your credit report and significantly reduce your credit score. Banks/NBFCs want to see a track record of on-time payments, which demonstrates you are a responsible borrower who can manage loan obligations. Even a few late payments can negatively impact your chances of two-wheeler loan approval.
- Length of Credit History: A longer credit history spanning many years portrays you as an experienced borrower who has demonstrated the ability to use credit responsibly over time. A short or non-existent credit history provides less information for lenders to assess, so they may perceive you as a higher risk for a two-wheeler loan.
- Credit Utilisation: Maxing out credit cards and having high balances close to your limit on revolving accounts increases your credit utilisation ratio. High utilisation signals risk as it appears you are overly reliant on credit. Keeping this ratio low by maintaining low card balances helps your credit score and two-wheeler loan approval odds.
- Credit Mix: Financial institutions like to see a healthy mix of both instalment loans (mortgages, personal loans) and revolving accounts (credit cards) in your credit history. This mix shows you can handle different types of credit responsibly. Limited account types may be seen as higher risk by two-wheeler lenders.
- New Credit: Applying for too much new credit over a short period causes multiple hard inquiries in your report, signalling high risk and temporarily lowering your score. Limit new applications to avoid this.
- Inquiries: Too many inquiries make financial institutions perceive you as credit-hungry and desperate. Having too many of these hard credit inquiries over a short period can imply that you are desperately applying for credit from many places.
Based on this information, most banks will check for a minimum credit score requirement before approving a two-wheeler loan application. Maintaining good credit and monitoring your credit reports periodically is key to increasing your chances of approval and getting lower interest rates. If you have poor credit, take corrective steps to rebuild your score before applying.
Tips To Improve Your Credit Score
If you already have a poor credit score, you can take steps to improve it before applying for a two-wheeler loan. Here are some tips:
- Review credit reports and check for errors. Dispute inaccurate information with the credit bureaus.
- Pay all credit card and loan bills on time, every time. Payment history has the biggest impact on scores.
- Keep credit card balances low. Having high balances close to the limit hurts scores.
- Apply for new credit only when needed. New applications can negatively affect scores temporarily.
- Mix types of credit accounts - instalment loans, mortgages, credit cards, etc.
- Don't close old credit cards, as the length of credit history matters.
- Limit hard inquiries by only applying for credit when needed. Too many inquiries can lower scores slightly.
Conclusion
The importance of good credit score to apply for a two-wheeler loan cannot be overlooked! It can help negotiate better loan terms like lower interest rates, flexible repayment options, and lower down payment requirements. On the other hand, a poor credit score attracts higher lending rates and may even lead to loan rejection. So start monitoring and building your credit score well in advance before planning to buy your dream bike or scooter through a two-wheeler loan.
