Car Loans: Why Credit Score Matters

No one would have guessed that the year 2020 would have resulted in a global lockdown. Now with things beginning to open up systems are being put in place to adjust to the new normal. Similarly in the auto sector, with moratorium on loans ending many individuals are opting for loan restructuring and are worried about the impact on their credit scores. Lenders are being cautious and referring to credit scores to make better decisions.

What is a credit score 

A credit score is a number that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.

What are the types of credit score and how does it matter

A credit score highlights your financial history and plays an important role in your financial journey. A credit score helps to determine credit worthiness, review missed payments, analyse loan/credit accounts under one platform and make effective decisions. At present there are 4 credit information companies in India TransUnion CIBIL, Equifax, Experian, CRIF Highmark.

How Important is a credit score for a car loan

A good credit score helps to get a loan/credit card easily, you can get better interest rates, a housing loan without any hassles and even high limits from banks and financial institutions. Taking a car loan with a good score come with perks, like more attractive interest rates and ease of getting a loan. 

The reason banks are willing to extend this offer to car loan applicants with a lower credit scores is because car loans are secured with the vehicle so funded serving as collateral. This reduces the risk lenders take by approving such loans.

How can one improve it? 

There is dispute resolution in case you notice errors in your report and if your credit history is bad you need to slowly improve it by making payments on time and not defaulting. However the need is to practise prudence and make sure you are not behind on any loan payments or credit card bills. With discipline you can improve your credit score over time.

With festive season around the corner there will be many offers one can avail off while opting for an auto loan. Credit scores are becoming important in the loan approval process, hence important to understand the importance of maintaining a good score.

Bhaskar Karkera

Guest Author The author is Chief of Wheels, AU Small Finance Bank.