Do you want to buy a car but face challenges with low credit scores? You can still own a car with a low credit score. This Shriram Finance blog will explain how you can get affordable financing options and rebuild your credit score to accelerate towards your dream car. Click here to learn more about the credit solutions of Shriram Finance.
Understanding the impact of a low credit score on car loans
A low credit score can impact your eligibility for a car loan. The following can be the impact of having a low credit score for your car loan approval:
High rate of interest
The banks or other financial institutions check your credit score before approving your car loan. However, there are low credit score car finance options, which attract a higher interest rate.
Limited option for loan
A low credit score may lead to fewer loan options, which may decrease the chances of availing of a suitable loan.
Shorter tenure to repay the loan
Because of a low credit score, your lender may provide you only a limited period to repay the loan amount, which may result in higher equated monthly instalments (EMIs).
Problems in approval
Your car loan approval can be challenging with a low credit score because the banks or financial institute checks your payment history before approving any loan.
Guarantor
The lender may need a co-signer or guarantor with a healthy credit score before approving your car loan.
Risk of rejection
Your loan could be rejected in the first stage because of a low credit score, which can ruin your dream of owning a car.
Impact on the credit score
If you apply for a car loan with multiple lenders, your credit score could be impacted substantially. Strict inquiries from each application are not a good sign for your credit score in the long run.
Fines and penalties on prepayment
Some lenders may impose fines and penalties if you prepay the loan before the due date. This is to cover their loss of interest income.
Exploring Options for Low Credit Score Car Loans
When you have a poor credit score, getting a car loan can be a daunting task. However, this can be done with the help of financial institutions. Today, many financial institutions understand that people face many issues with a low credit score, hence they come up with various loan options for them.
Car loan eligibility criteria
Car loan eligibility may differ based on your yearly income and repayment capabilities. Typically, the eligibility criteria are as shown below:
- The minimum age of the loan applicant should be 18 years.
- The maximum maturity age of the loan applicant should be 60 years for salaried and 65 years for self-employed and business owners.
- The minimum income per month should be ₹10,000.
- The person should either be salaried or self-employed.
- The person should have a minimum work experience of 2 years for a salaried individual. A self-employed person must be in the business for at least 2 year
- The loan amount can be different depending on the newness or oldness of the car.
- The loan eligibility also varies on the ex-showroom price or on-road price of the car.
- The person's residence can be urban, semi-urban or rural.
- The person should stay at the same address for at least 1 year.
How to apply for a car loan with a poor credit score?
A Low credit score car loan or car finance is sometimes possible. However, the approval process from the bank or financial institution can be delayed. Here are a few points you should consider:
Prove your income that can support the EMI payments
Banks and financial institutions check relevant documents, including your income statement and credit score. Even if you have a lower credit score, you can still get a car loan by presenting your last year's income statement to the bank or financial institution.
Show the records of existing bills
Your credit score goes up when you pay your bills on time. Repaying existing dues such as credit cards, EMIs, and utility bills on time proves that you repay your rights even if you do not have a good credit score.
Go for an NBFC loan
You can get a car loan from a non-banking financial company (NBFC) despite having a poor credit score. While banks have stricter policies towards loans, NBFCs have car loan offers where you can avail of car loans for poor credit scores. However, the rate of interest could be high.
Select a low car loan amount
When you have a low credit score, it is a risk for the lender due to a risk of default on the payment. You can opt for a low credit score auto loan and select a lower amount where you can pay the EMIs quickly and on a timely basis.
Maintain your credit score
A low-credit-score car loan helps you to get a loan even if you have a low credit score, but when you repay the amount on time, it helps build your credit score over time. And when you ask the lender for a loan next time, your chances of getting a higher loan increase substantially.
Get a guarantor or apply for a joint loan
You can get a low credit history car loan with a co-applicant. However, the guarantor must have a healthy credit score for faster approval. At the same time, this will help you get a better loan offer.
Opt for a secured loan
You can get a low-credit-rating car loan quickly if you use it against collateral to secure repayment. These collaterals could be your gold jewellery, private property, fixed deposits, etc.
Documents required to apply for a car loan
Car loan documents for salaried persons:
Identity proof: Aadhar card, PAN card, driving license, passport, voter's ID.
Address proof: Aadhar card, passport, driving license, voter's ID, family card, utility bill, life insurance policy.
Age proof: Aadhar card. Birth certificate, school transfer certificate, 10th standard mark sheet
Income proof: Salary slips, Form 16, Income tax return document.
Bank statement: 3-6 months bank statement.
Signature verification proof: Banks provide separate forms to fill in the signature for the application.
Proforma invoice: This document includes the price quoted by the car dealer selected by the applicant, and the loan amount is decided depending on the price of the car.
Car loan documents for self-employed persons:
Identity proof: Aadhar card, PAN card, driving license, passport, voter's ID.
Address proof: Aadhar card, passport, driving license, voter ID, family card, utility bill, and life insurance policy.
Age proof: Aadhar card, birth certificate, School transfer certificate, 10th standard mark sheet.
Income proof: Salary slips, Form 16, income tax return document.
Bank statement: 3-6 months bank statement.
Business ownership proof: Office address proof, maintenance bill, utility bill and business registration license.
Income proof: Income tax return of the last 2 years, audited balance sheet and profit and loss statement.
Signature verification: Banks provide separate forms to fill in the signature for the application.
Proforma invoice: This includes the price of the vehicle, which must also be filed with other documents that show the required loan amount. Typically, banks offer up to 95% of the cost of the car as the loan amount.
How to apply for a car loan?
Follow the steps listed below after selecting your car loan provider, the principal amount and the type of loan:
- Visit the branch office or the official website of the lender.
- Fill out the loan application form, attach a picture of your photo ID and other required documents, and submit the form to the lender's office.
- You can also fill out the application online and upload the documents on the official portal of the lender.
- The lender reviews your car loan application and updates the status through SMS or registered e-mail ID.
What is a Credit Score?
A credit score is a numeric representation of the financial health of an individual, which ranges from 300-900; it is generated by credit bureaus such as CIBIL™, Experian and Equifax based on the individual's credit history. The higher the credit score, the better the chances of loan approval and better loan deals.
How To Improve Your Credit Score?
To get your loans approved and get better deals, it is imperative to improve your credit score, which could be done by following the mentioned points:
Check your credit score
You must check your credit report periodically and check for discrepancies and errors.
Pay your dues on time
You must repay your dues on time to avoid interest and penalties and keep your credit score healthy.
Avoid taking multiple credits
Avoid applying for multiple credit cards or loans quickly, as it may lead to more hard inquiries on your credit report and impact your credit score.
Diversify your borrowings
You can have different mix of credits, such as credit cards and loans, to positively impact your credit score.
Build a Credit History
You must have a small credit history to build some credit score, such as applying for a credit card or taking a loan might help.
Tips to Get a Car Loan with Bad or Low Credit Score
- Look for lenders specialising in offering low credit scores for car loans.
- Offering a considerable amount as a down payment can increase your chances of getting the loan approved and better terms.
- If possible, consider having a co-signer or guarantor to improve the creditworthiness of the application.
- Show a stable income to the lender to improve the chances of your loan because lenders prefer offering loans to people with regular monthly payments.
- You must compare the interest rates of different lenders to get the best deal on the loan.
The bottom line
Getting a low credit history car loan can be challenging, but following the steps mentioned in this blog, it is possible. Be patient and improve your credit score to rebuild your credit and get a better offer.
Apply for a lower credit score auto loan with Shriram Finance. It provides a variety of automobile loans, including cars, trucks, vans, tractors etc. You can also finance a used vehicle. Apply for an auto loan now.
FAQs
1.Can I get a car loan with a low credit score?
Getting a car loan with a lower credit score is possible, but interest rates could be high.
2.Will my interest rates be higher with a low credit score?
Yes, car loans with lower credit scores generally attract higher interest rates.
3.How can I improve my chances of getting approved for a car loan with a low credit score?
You can show a stable income or apply for a loan with a guarantor.
4.Are there any alternatives to traditional car loans for low credit score borrowers?
Some car dealers provide direct financing with less documentation; you can avail of this offer, even with a lower credit score.
5.What are the risks of dealing with predatory lenders?
You may be charged a higher interest rate and hidden fees or get trapped in scams.
6.Can a car loan help improve my credit score?
Repaying your car loan on time can build your credit score over time.
7.Should I check my credit report before applying for a car loan?
Yes, checking your credit score before applying for a loan is a good practice, and you can understand reporting errors, if any.
8.How long does it take to build a positive credit history?
It can take a few months to rebuild your credit score.
9.Can I refinance my car loan in the future to get better terms?
You can refinance your car loan once you improve your credit score.
10.Is providing a co-signer for a low credit score car loan necessary?
No, however, it is an option that improves your chances of loan approval.
11.Can I buy a new car with a low credit score car loan?
Yes, you can buy a new car with a low credit score. However, you may have to pay a higher interest rate and more down payment.
12.Will my credit score be affected if I apply for multiple car loans?
Yes, applying for multiple credits can negatively affect your credit score because every inquiry can lower your credit score.
13.Are there any government assistance programs for low credit score car loans?
There are no specific government assistance programs for low credit score car loans in India, but some state schemes may help indirectly with some financial support.
14.Can I get pre-approved for a car loan with a low credit score?
Yes, getting a pre-approved car loan is possible with a low credit score, which might help you financially.
15.How long does negative information stay on my credit report?
Negative information typically stays on your credit report for seven years in India, affecting your credit score.
Key Highlights:
- Low credit scores can affect car loan eligibility, leading to higher interest rates and limited loan options.
- Options for securing a car loan with a poor credit score include providing income, paying bills on time, and considering NBFC loans.
- Documents required for a car loan application vary for salaried and self-employed individuals.
- Improving your credit score is essential for better loan approval chances and terms.
- Tips for obtaining a car loan with bad credit include seeking specialised lenders, offering a down payment, and comparing interest rates.
