Nailing Down Student Car Loans: A How-To Guide
Today’s students are faced with a double bind when it comes to finances. In addition to borrowing for their education, they often have to negotiate the tricky process of securing a student car loan. Students need reliable transportation to campus and work, for recreation, and for visits home. The Federal Trade Commission (FTC) reports that dealerships are charging an average of $31,000 for a new vehicle and $17,000 for a used car. Lenders will look at the applicant’s existing debt and their ability to repay student car loans. The good news is that even students with existing debt and little credit history can nail down financing for a new or used car.
Before applying for a student car loan
Students should look at lender expectations before shopping for a student car loan. Financial fitness and student status play a huge role in qualifying for a loan – especially if it’s the applicant’s first-ever car loan. The following five steps should be undertaken before looking for lenders:
Confirm current enrollment
Lenders will ask applicants to prove current enrollment in high school, college, or trade school. There may be an age cap of 25 years, a disadvantage to some older graduate students.
Maintain a solid grade point average (GPA)
Students can qualify for discounts on financing rates by holding a good GPA, and insurance companies may also offer better rates for students who excel in the classroom.
Check your credit
Student credit scores count more than almost every other factor when it comes to qualifying for a loan and receiving the best interest rates. While they are relatively new to financing, students may already have a good score if they have repaid credit cards they used for clothing, computers, music, or college expenses. The best interest rates typically go to students with a credit score of at least 700, with decent rates offered to applicants with scores above 600. Those with lower scores may be stuck with taking out a high-interest student car loan or work on improving their credit before applying for financing. Get your credit report for free at LendingTree.
Have a reliable source of income
Some lenders will not consider a student loan or grant a sufficient source of income. They prefer the borrower to hold a steady job. In calculating financial fitness, loan underwriters look at the student’s current debt obligations to determine if they earn enough to remain in school, pay for food and housing, gas and insurance, and make car payments on time.
Figure out how much you can afford
With a realistic budget, students can not only determine how much they can borrow, they can also narrow the list of vehicles they can buy. LendingTree’s Auto Loan Calculator will crunch the numbers to estimate monthly payments on a student car loan.
Where to shop for student car loans
Banks, credit unions, and car dealerships are the major source of auto loans for students. The FTC recommends that students engage in comparison shopping for loans. You’re shopping for a loan and a vehicle. Lenders offer a range of discount options on student car loans and financing rates can vary considerably.
Online loan comparison websites allow students to compare lender’s offers on interest rates, down-payment requirements, finance charges, trade-ins, and extended service contracts. Compare auto loan rates from multiple lenders at LendingTree.
Negotiating car loans for students
Here are key things to consider when speaking with lenders:
Student car loan limits. Some lenders have absolute ceilings on the amount they’ll approve on a student car loan. The limit may be determined by factors including the student’s income, existing debt, and credit score. Despite any limits assessed by the lender, students should never buy more car than they can afford without jeopardizing their finances.
Down payment credit. Ask if the lender offers 100% financing on student car loans. This can lower the costs you pay right off the bat. Although, students may want to consider making a down payment as a way to potentially reduce the interest rate on the vehicle. The Consumer Financial Protection Bureau says a trade-in or cash down payment reduces the total amount of financing and can reduce the monthly payment on the loan.
Discounts. Lenders may offer student discounts, rewarding lower interest rates to qualified borrowers with good credit and a high GPA. Some dealers may feature end-of-year bargain rates to move their vehicle stock. From time to time, manufacturers offer price discounts for students and recent graduates. Students should also look into extended terms for repayment. While the total amount of the loan increases with an extension to 72 months, the monthly payments are lower.
Lenders and dealers may also apply interest-rate discounts for students agreeing to the auto-pay feature that deducts payments directly from their bank account. Auto-pay can ensure payments are made on time, helping the student build credit.
Student car loan specials. Some educational institutions or alumni associations work with dealerships and lenders to get special rates for their current students. Speak with lenders as well as with financial advising offices at the school.
4 tips for tackling student car loans
1. Buy only a car that you can afford
The true cost of buying a car is the sum of the negotiated price, the loan (annual interest percentage rate, the term, and financing charges), licensing, vehicle insurance, gas, and maintenance costs. The FTC recommends not financing a car where the new debt load overwhelms existing savings, cost of living, and prudent reserves. Remember that cars with expensive features such as racing packages, sound systems, fancy wheels, and the like will jack up the cost of insurance. Websites like Kelley Blue Book, AutoTrader, and Edmunds can provide a good source of prices and resale value. A good rule of thumb is to never buy a car with payments and operating costs that exceed 20 percent of your income.
2. Consider a cosigner
Getting a co-signer with good credit can help students qualify for a loan or receive more favorable rates. A co-signer, such as a parent or relative, agrees to repay the loan should the student be unable to make payments. Even students with poor credit may be able to land a car loan with a co-signer. Remember, the credit of both the student and co-signer is affected by the success or failure of making timely payments.
3. Don’t use student loans to buy a car
Term length on student car loans is typically five years due to the fact that vehicles depreciate quickly. The interest accrues while the value diminishes. Consequently, making long-term payments to the Department of Education on a car with little value can play havoc with your finances if not your legal standing. In agreeing to a student education loan, the applicant agrees to restrict spending to tuition, room and board, and books.
4. Know what is negotiable
The Consumer Financial Protection Bureau recommends students should negotiate the total cost of the loan, not the monthly payment. A shorter loan term means paying less total interest. For example, on a $20,000 car loan and a 4.75% interest rate, the borrower would pay approximately $1,500 in interest on a three-year term. The same loan, with a five-year term, would cost more than $2,500 in interest. The bureau has a free auto loan worksheet available for downloading.
Down the road
Some auto loans can be refinanced at lower interest rates following graduation, but the student inevitably pays more over the long haul for the loan. A better plan would be to pay as much as possible on the principal to reduce the term and monthly payments.