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How Two Wheeler Loans Impact Your Credit Score?

How Two Wheeler Loans Impact Your Credit Score?

Last Updated : March 14, 2022, 6:46 p.m.

A large population of our country runs on two wheelers. But in the last few years – Since the cheapest Internet Services was introduced in India – there has been a sharp increase in the sale of two wheelers across the country. The reason: apart from the private conveyance, people are using it for several other purposes such as Delivery (Food, E-commerce, Medicines, etc.), Cab Services with Uber, Ola, Rapido, etc. Two wheelers have emerged as a source of income for many people. But many people cannot afford to buy a two wheeler by paying the full amount, that’s why they opt for a Two wheeler Loan.

Several leading banks such as HDFC, ICICI, SBI, Axis, and financial institutions as Bajaj Finserv, Tata Capital, etc. offer Two wheeler Loans to customers. Individuals can opt for a loan amount upto 90% of the on-road price of a vehicle at affordable interest rates.

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But there is a common question that customers often ask – How Two wheeler loans impact their credit scores? A credit score is an important factor in any individual’s financial life. Individuals who have an existing two wheeler loan or are looking to get one should know everything about the impact of a two wheeler loan on their credit score .

In this post, we will extensively cover all the details about how a Two wheeler loan affects your credit score so that you can understand the importance of it. To know more, keep reading.

Let’s Understand the Impact of Two wheeler Loans on Credit Score in Detail

As we said, leading banks and financial institutions provide the loan amount to customers to buy the two wheeler they want. Lenders provide a fixed tenure within which a customer needs to repay the loan amount. The most popular repayment method among customers is Equated Monthly Installments (EMIs). Before understanding the impact of two wheeler loans on credit score, it is important to know the factors that affect an individual’s credit score. There are mainly five factors and each of them has a different weightage. We are showing it in the table below. Please check it out.

Factors Affecting Credit Score Weightage
Payment History 35%
Current Debt 30%
Length of Credit History 15%
New Credit 10%
Credit Mix 10%

So, as you can see these are the five important contributing factors that have an impact on an individual’s credit score. Through these factors, we will tell you how two wheeler loans impact an individual’s credit score. Of all, the most important one is Payment History, as you can see it has the highest weightage of 35% to overall credit score. So, let’s start with this.

Timely Payment of Two wheeler Loan EMIs (Credit Payment History)

Payment history holds 35% of the overall weightage to your credit score , which is highest among all the factors. When you opt for a Two wheeler loan, you will need to repay the loan within a fixed tenure via EMI. The best way to maintain or improve your credit score is to make your EMI payments on or before the due date. Any delay in repayments can affect your credit score negatively and it will also reflect in your credit report. So, if you keep missing your EMI payments, the debt will keep accumulating and it will be quite difficult for you to clear off the loan.

All your loan repayments come under the Payment History aspect shown in the table above. So, if you make payments on time, your credit score will improve and vice versa. It’s as simple as that. To make timely repayments, it is important to have an early estimate of the EMI amount so that you can make a decision based on your repayment capacity.

You can make this decision by using the Two wheeler Loan EMI Calculator. Just put the Loan Amount, Interest Rate and Tenure into the tool. You will get the EMI amount instantly. For example, if you want to opt for a 3-year Two wheeler Loan of INR 50,000 at an interest rate of 20.90% per annum. On putting these details into the tool, the EMI amount will be INR 1,883. Always use this tool to know whether the EMI amount fits your repayment capacity or not, and then decide.

Current Debt

If an individual already has some existing debt, a Two wheeler loan beyond his or her Debt-to-income (DTI) ratio could negatively affect their credit scores. A low DTI ratio indicates an individual could get an additional loan. Lenders usually reject the loan application if a person has already been servicing a massive loan quantum. The reason is simple: if an individual has high debt and does not have sufficient income to service the new one, lenders will hesitate in providing the loan amount because of the credit risk they face.

Opt for a Two wheeler loan only if you have sufficient income to repay the loan amount. When you have existing debts and also have a high income, you are most likely to pay the EMI amount on time. And by doing this, your credit score will gradually increase. Remember that a loan is not something you take without any feasible requirement, otherwise, it may hurt your overall credit score.

Length of Credit History

Usually, banks provide Two wheeler loans to customers for a period of 12 to 48 months. So, let’s say you decide to opt for a two wheeler loan for 36 months and pay your EMIs on time for this period, it will have a positive effect on your credit score. The reason behind this is the ‘length of credit history’ factor which has a 15% weightage to your overall credit score.

All the payment (both late and timely) of your two wheeler loan will reflect on your credit report. Timely payments will automatically help improve your credit score.

When lenders notice that you have maintained such a good repayment behavior over a long period, they will find you perfectly suitable for new credit. Having a longer credit history with a good repayment track will always have a positive impact on your score. So, always try to build a lengthy credit history along with timely repayments.

Two Wheeler Loan Brings Better Credit Mix

Two wheeler loans help customers bring the much-needed credit mix in their overall profile. And credit mix has a total of 10% weightage on your overall credit score. The percentage may look small, but it is quite important. An ideal credit mix will be a combination of different kinds of credits (loans and credit cards) in your overall profile. For example, let’s say you already have an existing home loan. Now, you need funds to buy a bike. So, a two wheeler loan would be better as compared to a personal loan.

The first and foremost reason, a personal loan is an unsecured loan and the eligibility criteria are quite strict as compared to a two wheeler loan. A lender always checks the credit score of an individual before sanctioning a personal loan. On the other hand, two wheeler loans have slightly softer credit norms. People with low credit scores can also get a two wheeler loan. Other than this, banks also provide offers to their existing customers on Two wheeler loans, such as Lower Interest Rates, Lower Processing Fees, Faster Approval, Minimal Documentation, etc.

Having a credit mix is not something mandatory, but individuals having a credit mix generally see faster improvement in their credit score provided they make timely payments of their dues.

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