1. Payment history
Overall, your payment history carries more weight than anything because lenders use it for figuring out the risk they are taking in providing you with a loan.
Maintaining an insufficient credit or CIBIL score is among the main reasons why the loan can be rejected. Your CIBIL score tells the lender about your creditworthiness.
Banks work on the general principle that the higher the borrower’s CIBIL score, the lower their chances of defaulting on EMIs.
But the opposite is also correct. Therefore, before you apply, you must check your credit score for a car loan.
2. Inadequate Income
A lender evaluates how much loan amount you can avail and be able to repay by looking at your monthly income and employment stability. It happens a lot that a lender declines a borrower’s application just because the loan amount is higher compared to the repayment capacity of the borrower.
In order to avoid this from happening, you must ensure a stable income with a credible employer. If you are self-employed or you are a freelancer, then you should show documents like IT Returns, balance sheets, which would prove that your income is stable.
3. Incomplete Paperwork
Even though certain banks these days have relaxed their car loan eligibility criteria and documentation requirements, you must compile them to improve your approval chances. Hence, talk to your lender and make a checklist of all the documents you need.
Incomplete or incorrect paperwork is also one of the reasons for your car loan getting declined. It is advisable to take help from those who could guide you if they have recently taken a car loan when finishing the paperwork. In addition, you should also check the lender’s website to make sure that you have a clear idea regarding the documents that you need to share for the loan approval process.
4. Parallel Loans
After your payment history, it is your current debt is that happens to be the second most important factor when it concerns the calculation of your credit score. A car loan generally runs thousands of dollars, which is why it is best for you to avoid applying for parallel high-value finance along with it.
Consolidate your debt and pay it off before you apply for a car loan. The most important thing should be that you are paying your debts on time.
5. Credit Card Utilization Ratio
A high credit card utilization ratio can affect your approval chances and credit score in a negative manner. Maxing out your credit limit when you are not opting for a car loan is not an issue. However, if you plan to avail auto finance, you will have to ensure you maintain a healthy credit card utilization ratio a few months before opting for the loan.
To deal with this factor, you should draw up a budget to refrain from unnecessary expenses, request a higher credit limit, and make sure that there are timely repayments.
6. Inquiries
Inquiries are a recognizable factor. There are two types of inquiries. While the “Soft” inquiries do not impact your credit score, the company evaluating your credit because you have applied for a job and an inquiry by a credit monitoring service for which you have paid. The Fair Credit Reporting Act (FCRA) limits who can observe your credit report and if someone requests your credit information, that request will be recorded on your credit report and be there for two years.
If you apply for a home mortgage, credit card, car loan, or student loan, it will have an impact on your credit score.
