Are poor credit scores holding you back from purchasing your dream car? Check out expert tips on how you can get an auto loan even with low credit scores. 

Getting an auto loan with poor credit scores is a tricky task. Even if approved, lenders charge you higher interest rates leading to a bigger EMI and an increase in the overall loan burden.

But don't lose heart. We're here to help you out. Even if your credit score is not high, we can help you find a car loan at favourable rates. Repaying your car loan with timely payments is a great way to improve your credit score.

How to apply for a car loan with a poor credit score? 

The steps for applying for a car loan with poor credit scores are just the same as applying for an auto loan with a good credit score. You choose the car model, shop around, compare lenders, and approach your preferred lender.

But the big difference is that you will have to pay higher interest when you take a car loan with a poor credit score. The overall loan will cost you more, and you have to repay it with bigger EMIs or for a longer tenure.

Generally, borrowers with excellent credit scores – above 750 – are offered lower interest rates than borrowers with poor credit scores.

Here, we share the top tips with you to help you land a car loan with favourable terms, even if you have poor credit scores.  

Tips to help you get the Right Car Loan even with Poor Credit 

  1. Work on improving your credit score before you go car shopping 

The credit score is a three-digit numerical score that the lender uses to evaluate your creditworthiness. The higher the number, the better are the chances of securing the loan at favourable terms. The credit score is calculated based on your credit history like – previous loans, repayments on credit card bills, and other EMIs.

It's highly recommended that you check your latest credit score before applying for an auto loan (or any other type of loan). Ensure that your credit report is error-free. If you notice any errors or discrepancies, connect with the credit bureau to get them rectified.

If you have the time, say six months to one year, you can improve your credit score before applying for a car loan. Be on your best credit behaviour in the months before you take a car loan. Don’t take on any new loans or open a new credit card. Paying outstanding loan EMIs and credit card bills, closing/consolidating existing loans are a few ways to boost your credit score. 

  1. Offer to pay a large down payment 

The best way to ensure that your car loan gets approved with a poor credit score – is to offer to pay a large down payment. Generally, most lenders do not sanction loans for 100% of the on-road price of the vehicle. The loan amount covers only 80% of the car’s price. The borrower has to pay the rest out of his/her pocket. 

When you have poor credit scores, offering to pay a larger down payment can improve your eligibility for securing the loan. When you pay a large down payment, it reduces the LTV (Loan-to-value) ratio, reducing the lender's risk.

The larger the down payment, the better. The more you save for the down payment, the more it improves your chances of securing the loan, and better are the terms of the loan.

  1. Bring a co-signer on board 

Generally, borrowers don't require a guarantor/co-signer when applying for an auto loan. However, if your credit scores are poor, consider bringing a co-signer on board your loan application.

A co-signer is a person who takes the loan along with you. He/she is responsible for making the loan payments if the primary borrower fails to repay them. Ideally, the co-signer should be a person who has good credit scores.

Generally, most borrowers with poor credit scores ask their parents/relatives/well-wishers/friends to co-sign the loan. The major drawback with this option is that – it's a considerable risk for the co-signer. If you fail to repay the loan on time, the co-signer has to take responsibility for it.

If you're sure that you can repay the EMIs on time, you can go for this option. Having a co-signer improves the chances of loan sanction. It drastically reduces the cost of the loan by lowering interest rates.

  1. Go for a budget car and skip the extras 

Having a poor credit score means you won't be eligible for higher loan amounts. This means purchasing the latest sports car/SUV becomes impossible. Instead, go for budget cars and compromise on extra features like – premium leather seats, a sunroof, etc. – to reduce the overall loan amount.

When the amount you're looking to borrow is small, the lender is more likely to approve the loan, even with a poor credit score.

  1. Final resort – explore dealer financing 

Most car dealers have tie-ups with leading lenders – banks and NBFCs – to make it easy for their customers to avail of car loans. However, the biggest drawback of this method is that – loans taken directly from dealers are costly. The interest rates are high. On the positive side, the eligibility criteria are not stringent, helping you secure the loan quickly.

A word of caution – even if you're going with the lender suggested by the dealer, make sure to check around, compare interest rates, and negotiate the terms of the loan to work in your favour.

Also Read : What is a good CIBIL™ Score for Car Loan in India?

Use the Auto Loan as an Opportunity to Build your Credit Score 

Taking is a great way to build your poor credit score. By repaying the EMIs on time, you can significantly improve your credit score in the next few months. To avoid missing payments, set up automated payments via ECS. This way, the EMI is automatically deducted from your bank account every month, making sure that you don’t forget the payment. 

With regular payments, you can notice your credit score beginning to rise. Once your credit score improves, you can also consider refinancing your ongoing car loan for better rates.

Final Thoughts 

Securing a Car Loan with Poor Credit Score requires Extra Planning. With bad credit, you are likely to pay higher interest rates on your car loan. Make sure that you plan ahead so that it becomes easy to accommodate the car loan EMIs in your monthly budget.

Finally, don’t forget to save a larger down payment so that you can reduce the overall loan amount and improve the loan eligibility.


FAQs - 5 tips to get auto loans with a poor credit score

1. What are auto loans?

Auto loans are car loans or vehicle loans where the applicants seek financial assistance from lenders to purchase a new or pre-owned vehicle.

2. What is the tenure of auto loans?

The tenure of auto loans is usually up to 7 or 8 years

3. How to apply for auto loans?

A person can apply for auto loans through online (internet banking, mobile banking, apply through the website of the bank) or offline (visit the nearest branch of the bank) modes of application.

4. What is considered to be a healthy credit score required for auto loans?

The minimum credit score considered to be healthy for auto loans is 750.

5. Is the credit report of the applicant reviewed before sanctioning an auto loan?

Yes. The credit score and credit report of the applicant is usually the first point of reference for any lender before sanctioning auto loans.