How a good credit profile can ease your vehicle loan process

Understanding the role of your credit score

Your credit score and report play a crucial role in your vehicle loan journey. This score, which reflects your history of managing credit, signals your creditworthiness to lenders. In other words, it shows how likely you are to repay the loan.

A strong score is often accompanied by benefits such as the possibility of a more favourable interest rate on your loan, chances of a higher loan amount and easier approval of your loan application.

Hence, before applying for any loans, it is wise to review your credit score and report. If you find it lacking, you can take some steps to bring it back on track. These include:

·         Focusing on reducing current debt

·         Ensuring timely payments

·         Minimising new credit applications

By taking these actions, you can strengthen your financial profile and increase your likelihood of obtaining a loan that suits your budget.

Points to remember

· Loan-to-Value (LTV) ratio: The loan-to-value ratio is the share of the vehicle’s cost that the lender is willing to offer as a loan, compared to the amount you have to pay from your pocket. If the LTV ratio is higher, you can avail of a higher loan amount and thereby reduce your immediate upfront cost. But remember, a higher loan amount means a larger EMI. So, do the calculation to understand what suits your budget before you commit to the loan.

·         Fixed vs floating rates: Fixed rates offer payment stability, which is often preferred for two-wheeler loans, while floating rates may fluctuate over time.

·         Repayment flexibility: Choose a lender that offers EMI schedules aligned with your income cycle, whether monthly or quarterly, to help you manage payments seamlessly.

Keep track of the loan journey

Managing your loan responsibly goes beyond just making timely payments. Here are key practices to help you stay on a successful path:

·         Monitor your credit score: Regularly checking helps you stay informed about your credit status. This is especially helpful if you plan to refinance your loan or apply for future credit.

·         Avoid multiple credit applications: Each loan application can lead to a hard inquiry on your credit report, which might lower your score temporarily. Apply only when necessary and avoid frequent applications within a short period.

·         Stay consistent with payments: Set reminders or automate payments to avoid missed EMIs, which can impact your credit score and hence, access to credit on better terms. Remember, any delay in repaying or a missed payment will impact your credit score for 36 months.

Also read: All about RBI's new credit information reporting rules 

Boost your chances of securing loans

Adopting some financially prudent practices may help minimise the likelihood of your two-wheeler loan getting rejected:

1.      Set a clear budget: Use an EMI calculator to understand your monthly obligations and plan effectively.

2.      Strengthen your credit profile: A strong credit score enhances your chances of getting favourable terms. Review your credit score, pay down existing debts, and make timely payments to improve your profile before applying.

3.      Compare loan offers and terms: Understand the loan terms in detail, including interest rates and tenures and choose the lender that best supports your financial goals.

4.      Save for a larger down payment: A larger down payment reduces your principal loan amount, lowering your EMI and interest costs. It may also improve your standing with lenders, especially if your credit score is moderate.

5.      Consider prepayment flexibility: Since prepaying small amounts during the course of the loan can help save on the total interest cost, preferably choose a lender with flexible prepayment terms.

The first step when applying for a vehicle loan is to review your past credit history and bring it back on track. By understanding how your credit score impacts your loan terms and clearing any past defaults, you will be in a better position to drive away with a loan best suited for your needs. With the right planning, you can confidently take the wheel and enjoy the freedom and convenience of your new vehicle.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.