2021 is an exciting year for car enthusiasts. Several leading automakers like Hyundai, Skoda, Maruti, Volkswagen, Toyota and Kia have launched new models for the Indian market this year. With the average cost of a premium car with high-end features exceeding Rs. 10 lakhs or more, you will probably require a car loan to finance your dream vehicle. 

Whether you apply for a car loan at your bank or through the vehicle dealership, the lender does a credit check on your profile as part of the loan approval process. In this article, we highlight the credit score required to be approved for a car loan in 2021 and share tips on what you can do if the credit score is less than ideal. 

What is a good credit score to buy a car in 2021? 

“A credit score of 750 or more gets you the best deals on car loans. Having a credit score of 750+ helps you secure a car loan at the lowest interest rates.”

There are two key factors that lenders look at while approving car loans:

  • Credit score and credit report 

All lenders start by evaluating your credit score and credit report. If you are unsure of your latest score, you can check your credit score for free at CreditMantri. Just enter your PAN, mobile number and email ID and get your latest credit score within a few minutes. Having a high credit score improves your chances of auto loan eligibility and also helps you qualify for the best available rates. 

Besides checking your credit score, the lender also evaluates your credit history. The lender goes through your credit history to check if you have defaulted on any loans, whether you make timely payments on your loan EMIs, credit card bills and so on. 

  • Income & DTI (Debt-to-Income) ratio 

Apart from the credit score and credit history, the lender also evaluates your income and compares it with your existing debt payments. Having a low debt-to-income ratio works in your favour, as it demonstrates to the lender that you are not overburdened with ongoing debts. The lender uses the DTI ratio to determine if you can afford the monthly EMIs on your new car loan. 

According to credit data, people with credit scores below 600 have difficulty getting approved for a car loan. Even if approved, they are likely to pay interest rates significantly higher than borrowers with good credit scores. 

Related: What is a good CIBIL™ score for a car loan? 

What is the minimum credit score to buy a car in 2021? 

You are more likely to be approved for a car loan with a minimum credit score of 650. However, note that not all lenders sanction car loans to borrowers with a credit score in the 600-range. So, you are likely to be limited in the choices available. Even if approved, the lender charges a steep interest rate. 

In some cases, borrowers with credit scores as low as 550 can get a car loan, provided they meet other eligibility criteria like:

  • Having a steady income and stable job 
  • Having a low debt to income ratio and minimum (or zero) ongoing debts 

How does my credit score affect my car loan terms? 

Increasing your credit score by just a few points can help you save tens of thousands of rupees in interest payments. 

  • A high credit score will bring down interest rates; a low credit score will drive up interest rates; 

When you have a low credit score, the lender considers you at a higher risk of defaulting on the loan. So, they are likely to charge you more to reduce the risk borne by them. As a result, you will have to pay higher interest for the same loan amount. 

Let’s explain this with an example. Both borrowers A and B want to take a car loan for Rs. 12 lakhs for 5 years. 

Borrower A has a credit score of 787 and qualifies for a car loan at an 8% interest rate. His monthly EMI works out to be Rs. 24,332 per month. At the end of the 5 years, he would have paid a total interest of Rs. 2,59,900. 

Borrower B has a low credit score of 660 but manages to qualify for the loan. He gets the loan at an interest rate of 12.5%. His monthly EMI works out to be Rs. 26,998 per month. At the end of the 5 years, he would have paid a total interest of Rs. 4,19,851.

As you can see, having a poor credit score works to your disadvantage, as you have to pay higher interest on the loan, and it also increases your monthly loan EMI. 

  • Specific lenders do not sanction car loans to applicants with poor credit scores; 

Specific lenders have a cut-off credit limit below which they do not sanction vehicle loans. So, if your credit score is poor, then you have limited options. 

If you have poor credit scores, here are some tips to boost your car loan eligibility while lowering interest rates. 

How can I lower my car loan interest rates with a poor credit score? 

Check out our smart tips for borrowers with poor credit scores to qualify for a car loans at low interest rates:

  • Talk to the auto dealer 

Most auto dealers have tie-ups with car loan lenders. Explain the reason for your poor credit score to the dealer and prepare a statement of why you deserve a low interest rate despite having a poor credit score. 

For example, if your credit score dropped due to a recent big-ticket loan, but you’ve always paid your loan EMIs on time, then the dealer is most likely to consider your case. Similarly, if you have taken loans for your business, but the business is growing steadily, the dealer is likely to consider your case. 

Explain your financial situation to the lender and negotiate the terms and conditions of the loan to get a good deal. 

  • Bring a co-applicant on board

Having a co-applicant with a good credit score will help you reduce the interest rates on your car loan. However, keep in mind that getting a co-signer is tricky since if you default on the loan payments, the co-applicant has to pay the loan. So, if you are bringing a co-applicant, then make sure to pay your loan EMIs diligently to avoid damaging their credit score and trust. 

  • Pay a larger down payment 

A larger down payment reduces the principal amount. The lower the principal, the lower is the interest burden. Paying a larger down payment also reduces the risk borne by the lender, so you’re likely to qualify for lower interests. 

  • Improve your credit score 

The best strategy to reduce your loan interest rate is to improve your credit score. It may take a few months, but with patience and the right strategies, you can boost your credit score. Taking the time to improve your credit score will help you save thousands of rupees on your car loan and make it easier to qualify for bigger loans in the future. 

Related: Smart Tips to Improve CIBIL™ Score

  • Go for a smaller car 

A smaller car means a lower on-road price, which reduces the loan amount. Taking a lower loan reduces the risk borne by the lender, helping you secure lower interest rates. 

Wrapping Up 

Your credit score has a massive impact on your car loan. A good credit score of 750+ is the best way to secure car loans at the best possible rates. If your credit score is less than perfect, take some time to improve it before taking a car loan in 2021. 

Improving your credit score by just a few points can help you save tens of thousands of rupees in interest payments. So, before you go for a car loan, start by checking your credit score and work on improving it to land the best car loan deal. 

Related: Tips to Improve CIBIL™ Score

FAQs - What is the credit score required to buy a car in 2021?

  1. Is a credit score of 600 enough to buy a car in India? 

A credit score of 600 will not prevent you from qualifying for a car loan. However, the interest rates charged will be higher. So, it is highly recommended that you improve your credit score and boost it to more than 750+ to get car loans at the best interest rates. 

  1. Do I need a guarantor for a car loan? 

All car loans in India are secured loans, meaning the vehicle acts as the primary security. So, you don’t have to provide any collateral/security/guarantor to secure the loan. However, if your credit score is low or if you don’t meet the lender’s eligibility requirements, you may be expected to include a guarantor on your loan application. 

  1. What is the CIBIL™ score required for a car loan in India? 

Different lenders have varying eligibility criteria. Generally, having a CIBIL™ score of 750+ helps you access the best car loans at the best interest rates. 

  1. Will my credit score be checked for a used car loan? 

Your credit score will be evaluated for all auto loans, including used car loans. Having a high credit score helps you secure the best interest rates on loan and improve eligibility. 

  1. Can I get a car loan with a 720-credit score? 

A credit score of 720 is considered good but not excellent. You will qualify for the loan, but to secure the best interest rates work on boosting your credit score to 750+.