How Two Wheeler Loans Impact Your Credit Score?
According to a market research firm, the Indian two-wheeler market is touted to have a volume of 4.81 crore vehicles by 2028. And this means exhibiting a CAGR of 17% between 2023 and 2028. Now, multiple factors are affecting this growth; the availability of easy financing is one of the primary ones.
Financial institutions across India offer easy two-wheeler loans to help you get the vehicle you want. Moreover, you can easily find the ideal loan option with an online two wheeler loan EMI calculator.
Before moving ahead, it is wise to understand how a motorcycle loan affects your credit score. It will help you to make a more informed decision.
How do the two-wheeler loans affect your credit score?
Like any other credit option, motorcycle loans can leave a positive and a negative impact on your credit score.
Positive effects of motorcycle loans on credit score
Here are the positive effects of a bike loan on your credit score –
Improves repayment history
You can better your credit repayment history by servicing a two-wheeler loan. Since this aspect holds weightage in the credit score calculation, a strong record can work in your favour.
Furthermore, servicing a motorcycle loan enables you to extend your credit repayment history. Usually, lenders offer a loan tenure of up to 48 to 60 months. So, you can utilise this period to repay the credit and extend the length of your credit history.
Brings versatility to your credit profile
You probably already know how vital versatility is when judging your capacity as a borrower. To simplify, if you are someone who has only serviced short-term unsecured loans, the lenders will assume you are not comfortable managing the higher amount and long-term secured loans. Now, this can lower your credibility as a debtor.
Therefore, to rectify this and bring versatility to your credit profile, a motorcycle loan can help. It will improve your credit mix and help you establish your reliability as a borrower who can manage different types of loans.
Solidifies your repayment capacity
Timely repayment of any loan improves the credit score and cements your position as a borrower. The same is applicable with the two-wheeler loans. Once you start repaying the EMIs on time and without fail, you will see how it positively affects your credit score.
And, as you close the loan successfully, it will reflect on your credit report and improve your chances of securing loans in the future.
Negative effects of a two-wheeler loan on the credit score
Let’s understand the adverse effects of a two-wheeler loan on the credit score –
Short-term reduction of the credit score
Following your loan application, the financial institutions raise a query with the credit bureaus to gather information about you as a borrower. Now, these queries are typically known as hard queries, and they reduce your credit score. This is why financial experts suggest refraining from making multiple loan applications at once, as it can reduce your credit score.
Rise in the Debt-to-Income ratio
Another significant negative effect of the two-wheeler loan on your credit score is the Debt-to-Income (DTI) ratio increase. Once you take on debt and your income does not increase, it will amplify this ratio, which can negatively affect your profile as a borrower. Additionally, any defaults in the repayment will result in a reduction of the credit score.
Ways to secure a two-wheeler loan even with a low credit score
The benefits of a high credit score are well known, but the real challenge is securing a two-wheeler loan with a low credit score. However, it is not impossible, as there are some effective strategies that you need to follow. This will include –
Increasing the down payment amount
The best way to manage such a scenario is by making a higher down payment. This will have two benefits –
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The lender gains confidence if you pay an adequate sum upfront, as it will lower their credit risk.
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It will reduce your total loan amount, thus reducing the interest burden and outstanding burden.
Furthermore, you may also get the interest rate of your two-wheeler reduced by making a substantial down payment.
Arranging a co-signer
While evaluating your loan application, it adds to your creditworthiness if the creditor sees a co-signer with a sound credit score and repayment record. This way, you can get approved despite having a non-eligible credit score.
Opting for a higher loan tenure
Another quick way to secure a loan deal to purchase your dream motorcycle, even with a sub-par credit score, is by opting for a longer loan repayment tenure. Since the repayment period determines your EMIs, opting for an extended period will lower the monthly burden. This will help you convince the lender to give you the funds needed.
However, a point to remember is that a higher loan tenure can increase your overall loan burden.
Opt for a lender you have a working relationship with
Another effective strategy is to apply for a motorcycle loan with a lender you already have a working relationship with. Since the financial institution is already familiar with you, they may negotiate and extend you the financial support needed, even if you have a low credit score. Do keep an eye out for the interest rate and plan accordingly.
Parting Thoughts
The availability of two-wheeler loans has helped prospective motorcycle buyers to fulfil their dreams. This loan option has helped individuals to plan and streamline their purchases without straining their finances. At the same time, it affects your credit score, depending on how you manage the loan. So, plan and improve your credit score easily with a two-wheeler loan.
