How to use a two-wheeler loan to improve your credit score?
Article by Drivio | 23rd Jan 23
Acquiring a two-wheeler loan becomes easy when you have a healthy credit score. However, do you know that borrowing responsibly can also improve your credit score?
A two-wheeler loan is a financial privilege that can help you diversify your credit profile. In this article, we have explained how you can improve credit scoreby repaying your two-wheeler loan responsibly. You might be planning to purchase a motorcycle or scooter for personal or business purposes. In recent years, the demand for these vehicles has increased manifold. Thanks to the cost-effective and swift transportation facility, two-wheelers are witnessed a high demand.
Whether you plan to get a scooter loan or a motorcycle loan, you can qualify for flexible repayment plans from reputed banks and NBFCs. However, you may be worrying how taking such a loan can impact your credit report. Let’s explore the positive impact of a bike loan on your credit score.
Factors influencing your credit score: A quick look
Leading financial institutions and banks roll out low-interest loans to motorcycle and scooter owners. With each loan, you can decide the tenure based on your convenience. While repaying the loan, you need to pay a certain amount each month in the form of EMIs (Equated Monthly Instalments).
In the first place, it’s important to evaluate the factors that can improve credit score. Borrowers need to consider five prime aspects that impact their credit score. These include:
- Your repayment history: 35%
- Credit utilization: 10%
- Length of your credit history: 15%
- Credit mix: 10%
- Existing debts: 30%
Now that you know the factors that impact your credit score, it would be easy to evaluate the role of a motorcycle loanon your credit profile.
Using a two-wheeler loan to improve your credit score
Let’s examine the impact of timely repayment of your scooter loan on your credit score.
Balance your credit mix
Considering your overall credit profile, you need to balance your portfolio with all types of loans. As we explained credit mix accounts for 10% of the development of a healthy credit score. Along with personal loans, credit card loans, home loans, and education loans, your profile should also include two-wheeler loans. This ensures that your credit profile would look properly balanced.
Suppose, you already have an ongoing home loan and a personal loan. If you need another loan to purchase your motorcycle, go for a two-wheeler loan rather than an additional personal loan. With this type of financial planning, you can balance your credit mix.
Better credit utilization
Intelligible credit utilization accounts for 10% health of your credit profile. In this context, we are going to talk about DTI (debt-to-income) ratio. Under any condition, your ongoing EMIs should not exceed 50% of your income. With a low DTI, you can qualify for a two-wheeler loan easily. However, if you are already repaying a lumpsum amount each month your creditor might reject the loan application. In such a condition, you might fail to qualify for any kind of loan whatsoever.
Now, you must be knowing that motorcycle loans come at more affordable interest rates compared to personal loans. In case you take a two-wheeler loan to finance your bike, you would be shelling out a lower EMI each month. This would eventually bring down credit utilization, as you would be having a smaller debt to repay. As a result, your overall credit report would look better.
1. Improve credit record length
The longer your credit report, the better would be your credit score. Borrowing responsibly can help you strengthen your repayment history. Usually, you can enjoy flexible tenures for your scooter loans, ranging from 1 year to 4 years. So, if you decide to get a motorcycle loan for 4 years and pay the EMIs responsibly throughout the period, it can improve your credit score. At the same time, it would prolong your repayment history without any red marks.
Since the length of your credit history accounts for 15% of your overall credit score, a responsible financial planning can improve your credit score. Banks and NBFCs check your repayment history to evaluate your profile as a responsible borrower. When they know that you haven’t faltered on your motorcycle loan for three to four years, they would readily sanction other loans.
2. Timely repayment speaks for your commitment
Your repayment history accounts for 35% of your credit score. This is the strongest parameter defining your financial commitment. With a two-wheeler loan, you have to repay the EMIs within a few years. This brings you an opportunity to improve credit score by maintaining a flawless repayment history. Being a responsible borrower, try to pay the EMIs before the due dates.
Speaking of financial planning, many borrowers use a two-wheeler loan to improve their credit score. In case you have already tarnished your credit report by faltering in the past, taking a motorcycle loan and repaying it on time can improve the score.
As long as you are responsible with your loan repayment, you remain committed to your creditor. Considering that you would be paying off the loan in three to four years, you get a short window to boost your credit score.
How easy is it to obtain a two-wheeler loan?
Compared to personal loans, obtaining a motorcycle loan or a scooter loan is comparatively easy. In the first place, personal loans are unsecured in nature. Having too much unsecured debt in your credit profile isn’t a healthy sign.
Besides, lenders are not too hard while sanctioning two-wheeler loans. Therefore, the chances of rejection are comparatively lower. Remember, getting your loan rejected can dip your credit score. Explore the best two-wheeler loan offers with reputed banks and NBFCs where you can enjoy faster approval processes and lower interest rates. Also, many lenders are ready to provide these financial privileges with minimal documentation.
Repaying your two-wheeler loan on time can improve credit score and enhance your credit mix. Be a responsible borrower while improving your financial profile.