Earlier, individuals had to spend a lot of money when buying a car. However, nowadays, most individuals can own a car by availing a car loan. Banks and Non-banking Financial Companies (NBFCs) consider an individual’s salary and credit score when they approve a car loan. Therefore, having a good credit score is vital. However, if you have a low credit score, it is still possible to get a car loan. In such cases, where the applicant’s interest rate is low, lenders tend to charge high interest rates on loans which also come with not-so-favourable repayment terms.
There are various steps that can be taken by you to improve your chances of getting a loan approved. It is important to understand how the car loan process works when you try for a car loan with a bad credit score.
Some of the things to consider when trying to get a car loan approved with a low credit score are mentioned below:
- Improve on your credit score: The most important thing to do when buying a new car is to check your credit score. Paying off past dues and checking if there are any credit report errors and correcting them can improve the chances of availing a car loan with good terms.
- Check the rate of interest: It is vital to check the interest rate that is offered to you when availing a car loan. If you have good credit, the interest rates will below. However, the rate of interest is usually high when applying for a car loan with bad credit. It is important to make sure the interest rates are not very high as you would end up paying high Equated Monthly Instalments (EMIs).
- Know your budget: It is important that you know what amount can be afforded by you on a monthly basis. It is vital that you do not exceed your budget as you could end up in a financial problem. It is vital to stick to your budget even if you have a loan approved for a high amount.
- Check all the terms and conditions: It is vital to understand all the terms and conditions of the car loan before availing one. Make sure all the details that are told to you by the NBFC or bank are the same as the terms and conditions that are given to you. If there are any differences, it is advisable that you do not sign the loan document.
- Beware of scams: Scammers and fraudsters tend to target individuals with a bad credit score. It is vital not to fall into the trap no matter how important it is for you to own a car. Therefore, it is important to go through all the details thoroughly before opting for the car loan. It is also better not to opt for any add-ons such as insurance, extended warranties, and after-market services even if your car loan approval depends on it.
- Avoid making credit lowering mistakes: In the duration leading up to you availing a car loan, make all other payments on time. It is important that you do not make any high-value purchases or apply for new credit cards during this time. It is advisable not to raise any red flags in term sf your credit score as they may lead to your loan not getting approved or the interest rates being unaffordable.
- Increase the down payment: Increasing the down payment when buying the car can improve the chances of you getting approved for a car loan. Paying a higher down payment can not only decrease your interest rates, fees, and taxes but can also give you the option of buying a better car.
- Check for pre-approved loans: Check with your bank whether any pre-approved loans can be offered to you. Having a pre-approved loan can give you a budget that you can work with. Sometimes even the car dealers will be able to help you out in case you have a bad credit score.
- Compare: There are various third-party websites available where car loans can be compared. Providing details such as your salary, EMIs, Permanent Account Number (PAN), etc., will bring up various banks and NBFCs that offer car loans for your credit score. There are various banks and NBFCs that offer the same loan amount, but with varying interest rates. Therefore, doing a check online will help you get the best deal.
- Consider a co-signer: Taking an individual who has a good credit score to co-sign on the agreement can increase the chances of you getting the loan approved and get a better rate of interest. The co-signer basically agrees to pay the loan amount in case you can’t afford to pay it. Lenders consider approving the car loan in case the credit score of the co-signer is good as the risks involved are less in case of any defaults. This can help you in saving a large amount of money. However, having a co-signer will impact both yours as well as the co-signers credit reports and having a default will impact the co-signers as well as your credit scores. Therefore, it is important to make sure all the payments are made on time as you would not want to affect the credit score of the co-signer.
- Don’t buy a car expecting to sell it soon: Salesmen tend to raise your hopes by offering a trading option in the future. Even though this sounds like a good option, the pending loan amount is added to the loan amount that is required to get the new car. Therefore, your monthly payment increases. It is vital for you not to trade the current car unless your credit score increases, and rate of interest decreases.
Though it is tough to get a car loan with bad credit, following the above-mentioned points can help you get the best deal possible. It is vital not to over-burden yourself financially when taking up a car loan. Making payments on time can also help improve your credit score and increase the chances of getting a loan in the future with a low-interest rate. Click to find out how you can get car loans with a low interest rate.