Wednesday, 23 March 2016

What Credit Score Do I Need To Get A Car Loan?

If you need a personal loan or a car loan, is the same credit score acceptable for both types of loans? Well if you have a very good credit rating like above 750 then obviously you do not need to worry because anyways you will be eligible for both loans at the score. However if let’s say the applicant’s score is 650 then will the loan application be denied for both the loans outright or  can you get one loan and not the other?  Is there a basic level of credit score predefined by lenders, below which a loan is not available or are there other considerations also that impact the decision.
Credit Score and Loan Approval
Credit score affects the lenders decision for accepting a loan application, however there are other factors also. It is possible to get loan for low credit score at higher rates; for secured loans like car and home loans a bank may be willing to consider a low rating as they have an asset to cover the risk but for a personal or education they might not be willing to do so.
Another factor that will contribute to the decision making process will be the size of the loan and the LTV (loan to value) ratio. Obviously for a lower score the lender will be willing to offer a lower LTV and reverse for a higher score. When lenders look at credit ratings they also consider the reason for it being low, a poor track record in paying obviously throws up a red signal but if the score is low due to a skewed balance between unsecured and secured loans then the lenders might be willing to take a more lenient view. So a host of factors apart from the credit rating go into a lenders decision of sanction a loan.
So What Score Do You Need to get a Car Loan?
Like discussed above the credit score required can vary as per the loan type; here let us discuss what score is required if one is looking for a car loan. If one were to compare car loan interest rates one would realize that there is variation at which loans are offered by different vendors. NBFCs and co-operative banks are generally more flexible in their term and conditions, though they may offer loans at higher rates.
Banks like ICICI and Axis Banks offer loans at a CIBIL score of more than 750 while HDFC accepts a 780 plus score for a car loan.  L and T Finance offers it at 640 and more but at a rate higher than the above three banks. Some NBFCs may be willing to offer a loan at a score of around 500 also but their interest rates are an exorbitant, almost 15% compared to a 10% range of a mainstream bank.
Some banks like Union Bank of India may go beyond the credit score when deciding whether to accept a home loan or an auto loan application. The bank uses an internal model for scoring, which they use for making this decision. They take into consideration the applicant’s age, income, job stability etc for accepting or not accepting a loan application.  As stated earlier banks do consider other factors; if the score is lesser than the accepted level but the applicant is working for a reputed organization and has a stable job then the bank may be willing to be flexible or the bank may offer a lower LTV.
Generally rather than a fixed number banks may be willing to look at a range. For a score that is in the range of 720 to 40 banks will go the extra mile to check about the reasons for the low score. A score of 670 to 720 means some issues but the lender might be willing to consider lending as long as the applicant has a reasonable explanation or is able to convince the lenders about his repayment capacity. 600-660 implies problems and it is at the lender’s discretion if they want to make an exception. A score below 650 is an indication that you need to approach a NBFC if you do not have the time to wait and improve CIBIL score but you should be prepared to pay higher interest rates.

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