Thursday, 27 July 2017

Is your credit score high enough to get a Car loan?

Buying a car is an exhilarating experience irrespective of the car being the first or another count in the list. And regardless of it being purchased for convenience of moving around alone or with family or being bought just for the thrill of driving, owning a car is always stimulating. But one thing that one definitely need to own a car is availability of finance. Not only do cars are expensive item to own, it does make sense to invest your funds into a depreciating asset. It is not a mystery for anyone that the car loses its value within seconds of being rolled out from the dealership.
Now the big question that faces all is the car loan eligibility. How does the score impact your eligibility for a car loan? Will one with low credit score be able to fulfill the dream of driving an owned vehicle? Is there a benchmark of score below which the car loan will not get approved? Or is there a magical score figure that will guarantee approval of the loan? We at Credit Sudhaar, over last five years, have come across innumerable individuals who have asked such questions and who fear of getting a rejection letter for low credit score. Let us look at the reality.
How does credit score impact eligibility?
One’s credit score is reflective of one’s probability to default on a new loan. This numeric expression is an outcome of the data available on one’s credit report. Various parameters like the type of loans, the age of loans, the earliest loan and repayment among others impact the prediction represented in numerical expression on the credit report.
Is there any benchmark for car loan?
Like any other loan, a lender takes this data into consideration while underwriting. Some lender may keep a benchmark for the loan application request to even reach the underwriting stage. However, that may really not be the case with all lenders. While a score of 750 is considered to be a healthy score, people with lower score also get approved as per our observation.
Can you get a car loan with low credit score?
Let us first understand the definition of a low credit score. As mentioned above a score of 750 is presumed to be healthy, but it does not mean that a score of 749 or less is bad. Let us see following examples to understand this better.
Mr A : Has a score of 783 but got rejected
While the score was way above the benchmark of 750 that is supposedly a healthy score, he got rejected since there was a settlement reflecting on the report. Now the question is that how come a person who has had settlement can have a good credit score? This is because, the credit score is an outcome of dynamic algorithms that have various parameters impacting it. In case of Mr A, he has had one settlement two years back, but has been running three other trade lines viz. a home loan, a personal loan and a credit card without default. All the active trade lines were opened before the settlement and thus he was having a better score. But due to one settlement, his loan got rejected.
Mr B : Has a score of 702 but got approved
Despite having a score much lower than the benchmark of 750, car loan of Mr B got approved. This is because he has not had any default on any of the trade lines. He holds 2 credit cards for over 2 years and has also has successfully paid off 2 consumer loans.
Mr C : Did not have a score and got approved
In case of Mr C, he has recently started his professional life after completing education. He works for a MNC and has a healthy salary. Based on the overall profile, financials and the fact that the car loan is a secured loan where the lender possess the right over vehicle till the loan gets repaid completely, the loan got approved.
The result on the discussion

While this number on the credit report has a lot of value, but this may not be the deciding factor when one applies for a loan. The data captured on the report is what matters the most. And depending upon the overall profile of the borrower, the risk appetite of the lender and different terms like higher rate of interest, higher down payment etc. may help one to get the loan.

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