Car Loans for Students: Everything You Need to Know
You often have many financial responsibilities to handle when you’re a student. Many students pay for their expenses, including tuition, books, housing, food, and other basic living expenses. But having a way to get around is also a must, especially if you don’t live close enough to your school’s campus to walk or rely on public transportation.
If you work while attending school, it can be even tougher to manage without a reliable form of transportation. However, most students don’t have the cash to pay for a car.
Taking out a loan for a vehicle is an option available to those with good credit history and the ability to make an on-time payment each month. You may wonder whether you can qualify for a car loan, especially while attending school. As a young adult, you may not have much credit history, and some college students have already taken on student loans.
Fortunately, lenders understand the challenges of attending college, and many offer car loans for students. These targeted loan programs cater to the unique circumstances of college students and may be available to recent high school graduates and international students.
Learning more about student car loans and how car loans generally work can help you determine whether you want to pursue taking out a loan for a vehicle and what it takes to qualify.
A Breakdown of Car Loans
Before you decide whether to take out a loan to buy a vehicle, it’s helpful to understand how this type of loan works and what to expect when entering a borrowing agreement. A car loan is a closed-end loan, so the lender provides the borrower with a fixed amount of money. In exchange for the loan, the borrower repays the money with interest to the lender as equal monthly payments.
Although the vehicle the borrower purchases serves as collateral to secure the car loan, many lenders still require borrowers to pay a portion of the purchase price as a down payment.
The amount of money you put down factors into the monthly payment you’ll have to make to pay back the loan. Other factors include the price of the car and the interest rate for which you can qualify. The interest rate on a car loan depends on your credit history, employment status, and other financial factors.
Most borrowers choose fixed interest rates on car loans, although some banks offer variable rates. The federal funds rate and lender’s financial situation can affect a variable interest rate over the term.
The payment stays the same with a fixed interest rate throughout the loan term. With a variable interest rate, the payment amount can go up, and you could pay more in interest than you initially thought when you took out the loan.
A car loan typically has a term that lasts between two and six years. Some lenders assess penalties for early payoffs, while others allow borrowers to pay off their loans early with no issues. A longer loan term results in a lower monthly payment.
Car Loans vs. Car Leases
You may find information about leasing a vehicle when looking into car loans. Both are viable options, although leasing may be more difficult when you’re a student. A car lease allows you to drive a new car provided by a dealership in exchange for a fixed monthly payment. However, you won’t own the vehicle at the end of the lease term. Instead, you can pay additional money to buy the car or simply return it to the dealership.
Qualifying to lease a car requires good to excellent credit and a steady source of income. According to data supplied by Experian, the average credit score of lessees in the third quarter of 2020 was 733. A score of 670 or higher ranks in the “good” category with FICO. Leasing a vehicle still shows up on your credit report, even though you don’t own the car at the end of the term.
At the end of a lease agreement, you can take on a car loan to pay the remaining balance and keep the car if the contract allows for purchase. A lower monthly payment is one of the main selling points of leasing a vehicle. When calculating the monthly payments for a leased vehicle, a financial pro looks at how much the car will depreciate during the term. You will pay toward that value during the lease agreement term, leaving the residual value at the end.
Why Car Loans for Students Are Challenging
Many college students are learning about financial independence for the first time. As a result, they may not have the credit history or steady income source needed to qualify for a car loan.
Lenders must protect themselves and their interests when issuing loans, so they scrutinize applicants to ensure prospective borrowers can repay the borrowed money. Some of the reasons why finding car loans for students can be challenging include the following:
Poor or No Credit
Credit history is a significant factor among lenders when determining whether applicants qualify for loans. If you’ve never had a credit card or loan, you may not have any history when a bank decides whether your financial situation will allow you to repay the loan. Student loans rarely affect your credit until you graduate, when you must start paying them back.
Some students struggle with financial independence, get into credit card debt, or fail to make payments on time. These habits can harm your credit, making you a poor candidate for a car loan. It’s essential to make smart financial decisions when you get your first credit card to avoid affecting your credit history.
If you have poor or no credit, you may still qualify for a loan but at a higher interest rate. Since the interest rate determines how much you must pay each month, you need to compare rates and choose a loan that suits your financial situation. If you need a car but can only qualify with a higher interest rate, consider choosing a less expensive car to keep your monthly payment affordable.
Loan Maximums
A lender may cap the amount of money a student can borrow to pay for a vehicle. As a result, you might only be able to buy a used car that falls below the loan maximum.
Lenders placing lending caps often restrict borrowing to no more than $15,000 or $20,000 for a student car loan. If you don’t have much money to put down, you may feel limited in the type of car you can get.
Minimal Income
Another factor that lenders look at when assessing loan applicants is their income and whether it can support the monthly payment. Employment history also factors into the qualification process.
Your income level may be low if you’re working part-time while attending school full-time, but you can show a lender that you’re employable and may remain in your current role by having a stable job. Getting a car loan may be more difficult if you jump around in your professional life or just recently started a new position.
Additional Expenses Associated with Vehicle Ownership
When assessing your financial situation and whether you can afford a car, consider the additional expenses you’ll incur with a vehicle. Every state requires drivers to maintain car insurance, so that’s an added cost. And since car insurance premiums are higher for younger drivers, you may pay more for your policy.
Other costs of owning a car include gas, regular maintenance, repairs, and parking. Choosing a fuel-efficient or hybrid model can help keep your gas costs under control, but you’ll still have to pay up every time you head to the pump. The cost of repairs depends on the make and model, but foreign cars generally cost more to repair than domestic models. Depending on where you go to school, you could also have to pay for a parking pass.
Tips for Student Car Loans
If you can’t qualify for a car loan on your own while going to school, you don’t have to give up on your dream of buying a vehicle. Instead, you can consider other options, such as using a co-signer or working to improve your credit.
Use a Co-Signer
A co-signer is an individual who acts as a co-borrower for your loan. If you can find someone with good credit willing to take on the financial liability, such as a parent or another family member, they might help you qualify for an auto loan.
Improve Your Credit
Working to improve your credit can also help you qualify. If you have outstanding debt, plan to pay extra each month to bring the balance down and pay it off more quickly.
If you currently have no credit history, it’s wise to get a credit card with a low limit and use it to make everyday purchases. By spending on a credit card and paying off the balance each month, you can show that you’re a responsible borrower.
Become an Authorized User
Another option is to become an authorized user of another person’s credit card. Some credit card companies report authorized users to credit reporting agencies, and the cardholder’s financial habits can positively impact your credit. Before going down this road, you must ensure that the credit card company reports authorized users.
Save Money for a Down Payment
Having more money to put down may also lessen the risk a lender takes on by issuing a loan to you. Try to work as much as possible without letting your performance in school suffer so you can save more money for a down payment. You might also consider taking side jobs, like delivering food and groceries or transporting passengers, if you need to earn some extra income.
Create a Personal Budget
When you buy a vehicle, it’s crucial to establish and stick to a budget. It’s easy to get tempted by high-end models with all the latest features, but you don’t want to take on a higher debt that you can’t afford.
Assess how much you can afford to pay each month after you pay for all your other living expenses and determine the loan amount that meets that monthly payment requirement. Don’t forget to calculate your down payment to get an accurate estimate when running the numbers.
Keep Your Grades Up
Some lenders reward students who earn good grades while attending college. You may qualify for a lower interest rate or a discount on the loan simply by keeping your grades up and demonstrating your level of responsibility and dedication to your schooling.
Get a Job
A steady income source can help you look more stable and appeal to a lender who may consider you for a car loan. If you’re not working while attending school, it’s harder to show proof that you can make the monthly payment. Even a part-time job can help you earn income that will emphasize your financial stability for a loan.
Consolidate Your Debt
You may consider consolidation when you have outstanding student loans and want to take out a car loan as a student. Debt consolidation refers to lumping all the money you owe into one account and making one payment each month to pay down the balance. Some lenders restrict debt consolidation options based on your debt type, so you need to check with your lender(s) to determine whether your debt would qualify.
Using a Student Loan for Vehicle Purchase
If you take out loans to pay for your educational expenses, you may wonder whether you can use the funds to pay for a car. This option depends on your student loan terms and how the lender designates the use of the funds. If your college or university considers transportation as part of the overall cost of attendance, you may be able to use the money to buy a vehicle.
It’s best to discuss your question with your student loan provider or the financial aid office at your school to find out whether you can buy a car with your student loan money. The last thing you want to worry about is facing a penalty for misuse of loaned funds.
Where to Find Student Car Loans
Many lenders offer student car loans, each with a list of qualifications and requirements for borrowers. Regional banks, credit unions, online lenders, and national financial institutions may provide student lending options. Shopping around is the best course of action to get a competitive rate and terms that work with your financial situation.
Start your research by looking for lenders specializing in student car loans. They might offer rebates, special interest rates, or other appealing terms to students purchasing cars. If you attend a school with an affiliated credit union, you might also want to see what the credit union offers. Some lenders offer special rates and terms for first-time car buyers, which may apply to your situation if you’re buying your first vehicle without other financial help.
Automotive manufacturers may also provide incentives and rebates to students and recent graduates. Dealerships can extend those special offers to qualified buyers.
However, these typically only apply to new models, which might not fit into a student’s budget. Additionally, dealership loans may be more expensive than loans offered by lenders specializing in car loans for students.
Loans for International Students
Qualifying for a car loan is often more challenging for international students living in the U.S. while attending a university or college. If you’re living in the country on a student visa or another type of temporary visa, you may qualify if you can prove your ability to repay the loan. Some lenders will work with students living in the U.S. on TN, L-1, F-1, H-1B, and OPT visas and those with green cards.
Since international students don’t have Social Security numbers, lenders may need to verify their credit history in other ways. A lender might review the credit file kept in your previous country of residence to ensure you don’t have any debts in collection or bankruptcies in your financial history.
When you’re considering getting a loan, it’s also helpful to consider the repayment term. A lender likely won’t approve you for a loan with a long repayment term that extends past the length of your stay if you’re in the U.S. on a visa with an expiration date. An international student can rely on a co-signer to qualify for a loan, but some lenders require co-signers to have permanent residency or citizenship in the U.S.
Before you can buy a vehicle, you need to get a driver’s license in the same state where you attend school and secure a car insurance policy.
Shopping for Car Loans for Students
If you’re ready to take the next step in purchasing a vehicle, you can start comparing car loans for students. Online lenders often provide more competitive rates and options than traditional lenders with brick-and-mortar locations and higher overhead costs.
However, if you find a bank or credit union that offers special student pricing, this option may be more affordable. Take a closer look at a few of the top-rated lenders that offer competitive car loan options for students:
Boro Auto Loans for Students
Consider using Boro Auto Loans for Students because it is a great lender if you don’t want to rely on a co-signer to qualify. Some factors that this company considers include your college major and current grade point average. If you’re going into a potentially lucrative field and earning high grades in school, you may qualify, even if your credit history isn’t perfect.
One thing to note about taking out a loan through Boro is that you’ll have to put 25%-35% of the car’s purchase price as a down payment. The exact percentage depends on the loan amount, although the company doesn’t have a strict cap on how much you can borrow. International students can also take advantage of the program if they qualify.
Boro offers car loans to students in 32 of the 50 states in the U.S. The starting rate is 6% APR and loan terms vary depending on the borrower’s down payment and financial situation.
Stilt
If you want to buy a car without a co-signer, Stilt may be your best lending option. This company offers personal loans to residents and non-residents, so auto loan options are available to international students. When assessing applications, loan underwriters look at students’ previous financial actions, education level, and GPA rather than placing a high value on their credit scores. Stilt is one of the few lenders that doesn’t allow co-signers.
The maximum loan amount available through this company is $35,000. The interest rates typically fall between 7.99% and 15.99% APR. These rates are substantially higher than what you might qualify for through another lender, but customers who may not get approved for an auto loan elsewhere can often get one through this company.
myAutoloan
If you don’t have excellent credit, myAutoloan may be a lender you can count on to finance your vehicle purchase. This company specializes in financing for people with credit scores of at least 550. If you want to apply for a loan, you can’t have any open bankruptcies, and you must earn at least $24,000 annually. Additionally, myAutoloan requires applicants to be permanent residents or citizens of the U.S. and at least 18 years or older.
The starting rate through this lender is 2.15%, which is quite competitive in the auto loan industry. If you meet their qualification requirements, you may secure a loan with a lower monthly payment than you would through another lender.
LendingTree
Although LendingTree isn’t a lender, this company can connect students with various lenders, making it easy to compare options quickly. Through partnerships with different banks, credit unions, and online lenders, LendingTree simplifies the comparison process and offers links to each lender so you can go straight to the application page on a lender’s website. Most lenders who work with the company require applicants to have a credit score of 670 or higher, so you will probably need a co-signer.
Since students can access multiple lenders through this option, they can decide which loan works with their needs. The starting rate is 1% APR, although credit history and other factors will play into the rate for which you can qualify. LendingTree also doesn’t have a maximum loan amount, although individual lenders may place a cap on how much students can borrow.
SuperMoney Auto Purchase Loans Marketplace
SuperMoney Auto Purchase Loans Marketplace is another resource for students considering taking out car loans. It’s similar to LendingTree in that it connects customers with lenders who may offer them competitive rates and loan term lengths. An applicant needs a verifiable income source and a fair to good credit score. Additional requirements include being 18 years or older and a citizen or permanent resident of the U.S.
The minimum credit score to qualify for a loan through this marketplace is 600, which is lower than other lenders’ requirements. The interest rate varies by lender, and your financial history and the amount you have to put down will factor into your rate.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
