How Your Credit Score Affects Interest Rates on a Used Car Loan

Purchasing a car is a significant financial decision for many, but the cost can often be overwhelming. Opting for a used car provides a more budget-friendly alternative. To further ease the financial commitment, you can get a used car loan. These loans are as commonly sought after as new car loans in today’s market. 

Like any loan, used car loans come with repayment terms, interest rates, down payments, and eligibility requirements. One of the most critical factors influencing the terms of your loan is your credit score, which directly affects the interest rates and monthly payments you will be required to pay.

Lenders use your credit score as an analytical tool to determine your financial behaviour. Lenders check your credit score to see how much you are capable of repaying the loan for your used car. Your credit score will depend on factors like:

• Your repayment history

• Total debt

• Credit history 

• Length of debt

A high CIBIL score shows that you manage your finances well. On the other hand, a low score can make lenders see you as a potential risk.  

Since used car loans can be pretty high, lenders want to be sure they will get their money back. That’s why they use your credit score to assess the risk. Keeping a good CIBIL score helps you get better loan deals.

If your credit score is unsatisfactory to the lender, here’s how the interest rate on the loan gets affected:

• High Credit Score Leads to Lower Interest Rate

If your credit score is above 700, lenders see it as good or excellent. This score will determine your good financial health, and you will be eligible to get a used car loan with a lower interest rate. The good score is ranging between 700 to 900. 

A score closer to 900 will allow you the lowest interest rate offered by the lender. This will save you a lot of money in the long run. To simply put it, a high credit score gives you access to the best loan deals.

• Low Credit Score Leads to High Interest Rate

Your credit score is poor if it’s below 650-700. This signifies you do not have good repayment behaviour. The lender considers this as a potential risk. 

In this case, even if they sanction a loan for your used vehicle, they will charge you a high interest rate. Some lenders even can give you the loan only after you pay a huge amount of down payment.

Not only the interest rate, a poor credit score can impact other loan-related factors that can significantly reflect in your expenses. 

Impact on Loan Approval

There is a possibility a borrower can not secure a loan if the credit score is not per the lender’s standard. Card holders who have a score below 600 often face this situation. In this case, you can negotiate to get a consignor or agree with a short repayment tenure. Short tenure can make the loan management process hard. 

Impact on Down Payment

Your credit score will tell how much down payment you have to make in order to get the loan. Borrowers with a good score usually need to pay a lower amount of down payment. On the other hand, you need to pay a significant amount of down payment with a lower credit score. It’s a way lenders try to reduce the risk as much as possible. 

Impact on Loan Terms

Your credit score also affects how flexible your loan terms can be. With a good score, you get more options, like longer repayment periods or better payment plans.

Impact on Additional Offers

If you have an excellent credit score, you can get special offers from lenders. Many car brands and dealerships give discounts or deals to buyers with high scores, helping you save money. Lenders offer these perks because they trust you to repay on time.

A low credit score doesn’t mean you can’t get a loan. Instead, focus on improving your CIBIL score before applying. Here are some simple steps to boost your score and build a strong credit history:

• Pay on time: Lenders see late payments as a red flag, so pay on time. This goes for all the EMI and credit card dues. Use a reminder so that you don’t forget to pay on time. Most loan apps have the reminder feature to help you pay the dues on time every month

• Keep balances low: Avoid using too much credit and manage your spending wisely

• Maintain a good credit mix: A balance of secured loans (like home or gold loans) and unsecured loans (like personal loans or credit cards) is better. Too many unsecured loans can give a bad impression to the lender

• Monitor joint accounts: If you have an add-on credit card account or guarantee a loan, you’re responsible for other people’s missed payments. A co-borrower’s mistake can affect your credit score negatively

• Check your credit report regularly: Reviewing your credit score often to spot issues early and avoid loan rejection

Keep in mind that building a good credit score takes time, but once you achieve it, it will benefit you in the long run. With a strong credit score, you can purchase your dream pre-owned car with better loan terms and interest rates. 

Explore the loan options at Bajaj Markets and choose the one that suits you best. Take help of a used car loan EMI calculator to plan your repayments before applying for the loan.