How to Get a Car Loan as a Student
Preparation is key for students who need car loans
If you’re studying away from home or attending college in your hometown but don’t have your own set of wheels, you may be craving the independence a car could provide. Many people finance auto purchases through car loans, and this may be a necessity if you need to buy a car without financial help from a parent.
As long as your age qualifies you to enter into a legally binding contract in your state, lenders can't factor in your age when deciding whether to give you a car loan. But if you're a college student, you likely don't yet have the credit that lenders typically require to approve a car loan and might be wondering how a student can get a car loan.
Although it can be difficult to secure your first auto loan, there are many steps you can take to get and maintain a car loan as a student.
Secure Income to Get a Student Car Loan
No matter how you plan to get a car loan as a student, getting a steady income is the first step. Lenders may use your debt-to-income-ratio (your total debt relative to your income) to assess whether you can financially handle a new loan. The lower the ratio, the more manageable your monthly payment likely will be over the life of the loan.
It's tough to get a flexible, good-paying job and juggle college at the same time. However, many colleges offer work-study programs for young job seekers. And there may even be businesses in your college town that hire part-time workers.
A debt-to-income ratio of below 40% is ideal.
Save for a Down Payment on a Car
A down payment is money you pay up front toward the purchase price of the car. It can take the form of cash or the amount you get from trading in another car (for example, the car you drove in high school). Putting money down on a car loan will reduce your monthly payment and the total cost of borrowing. And the larger the down payment, the less you'll need to borrow.
Accumulating a pile of cash when you're young might be one of the most difficult things you've ever done. Watching all your friends with the latest tech gear and fashion can easily sidetrack your financial goals. However, if you want a car, you'll need to make sacrifices and exercise discipline when saving. The best way to do so is to make a budget and allocate a certain amount of money every month toward your car down payment.
Follow the 20/4/10 rule when getting a car loan. That is, make a down payment of 20% of the vehicle's value on a loan that lasts no more than four years and has principal, interest, and insurance costs of no more than 10% of your gross income.
Get a Student Car Loan With a Co-signer
The easiest way to get approved for a car loan if you're a student without an established credit history is to get a co-signer. This is someone who promises to repay a loan on your behalf in the event that you can't do so. Having a co-signer boosts your odds of loan approval because it suggests to lenders that they will get their money back one way or another.
Seek out a parent, close family friend, or another co-signer with a steady job and good credit who is willing to vouch for you. But remember: A co-signer will take on responsibility for the total cost of the student car loan if you fall short, including collection costs and late fees. Late payments or defaults can hurt your and your co-signer's credit, so have a discussion with the person about the risks and benefits before you proceed.
Consider Multiple Lenders
Several different organizations offer car loans. Direct lenders, such as banks, credit unions, and online lenders, allow you to get preapproved for financing so that you know your loan terms ahead. However, you can also get a car loan as a student through a dealership, which offers extended hours, multiple payment options, and incentives like low interest rates for creditworthy borrowers.
Start by checking with the institution where you currently bank. But shop around for the best deal for your situation. One source doesn't stand out above the rest for every borrower.
Factor in Other Car Expenses
Your monthly car payment isn't the only cost of having a car as a student. If you're on a tight budget, think about all the expenses tied to a car purchase.
You'll need to carry at least the minimum car insurance required by your state, so get a car insurance quote before signing for your car loan. The cost will depend on several factors, including your age, driving history, and your specific car, but it generally rises as the driver's age and years of driving experience decreases. Also, consider the cost of gasoline and vehicle maintenance. It won’t be fun or practical to have your own set of wheels if you can’t afford to fuel up and drive around your college town.
Refinance to Get a Better Car Loan
Once you figure out how to get a car loan as a student, avoid making late or missed payments, which can lead to negative items in your credit reports or even the repossession of your vehicle.
If you're worried that you might fall behind on payments because of a temporary financial setback like a job loss, consider refinancing your car loan a few years down the road when your credit has hopefully improved. This is when you replace your existing loan with one with better terms, such as a lower interest rate or a longer loan term.
Before you refinance, consider how the new terms will impact your total loan costs. While a lower interest rate may reduce your financing costs and thereby your total loan costs, a longer loan term may decrease your monthly payments but increase your total loan costs.
The Bottom Line
Your circumstances may force you to learn how to get a car loan as a student. You don’t want to drive around in a beater that will leave you stranded on the side of the road on a regular basis, but nor do you want to get a student car loan you can't afford.
Even if you lack a strong credit history, don't assume you won't qualify for a car loan. With the advice above, you can get a car loan as a student, but do your due diligence to make sure it's a sound financial decision.
Consumer Financial Protection Bureau. "Can a Lender or Dealer Consider My Age, My Receipt of Part-Time Income, or My Retirement Income When Deciding Whether to Give Me an Auto Loan?" Accessed June 8, 2020.
Experian. "How to Get a Car Loan." Accessed June 8, 2020.
University of Nebraska Lincoln. "Money Secret: Tips for Smart Financial Decision-Making," Page 1. Accessed June 8, 2020.
Consumer Financial Protection Bureau. "I Was Asked to Co-Sign Financing for a Car. What Am I Being Asked to Do and What Does This Mean for Me?" Accessed June 8, 2020.
Financial Trade Commission. "Financing or Leasing a Car." Accessed June 8, 2020.
National Association of Insurance Commissioners. "A Shopping Tool for Automobile Insurance," Page 8. Accessed June 8, 2020.
Consumer Financial Protection Bureau. "Worried About Making Your Auto Loan Payments? Your Lender May Have Options That Can Help." Accessed June 8, 2020.