Get a Student Car Loan

Individuals who are still in school might be looking for a way to finance a vehicle for personal use. Although students have some specific challenges when they go to get a car loan, some modern lenders are creating more alternatives for those who need to prove their credit worthiness without a large income or long credit history. By researching your options before applying, you will be able to negotiate the most favorable loan terms you can as a student.

Steps

Preparing to Apply

1. Be currently enrolled as a student. In order to qualify for a student auto loan in many cases, you must be currently enrolled in an educational program (undergraduate, graduate, technical, high school, etc.). If you are taking a semester off from your program, for instance, you may not be permitted to apply for a student auto loan.
   • You may be asked to show proof of your enrollment, such as a student ID or enrollment certificate.
   • Some lenders have age restrictions on who can apply for a student auto loan (such as only students between the ages of 18 and 24), while others have no such restrictions.
2. Have a good grade point average (GPA). Some lenders will offer student discounts if an applicant has a high GPA. If your GPA is not high enough, you can consider working to raise it before applying for an auto loan, or look for other discounts instead.
3. Have income. Many lenders will only provide an auto loan if the applicant has income, even if the applicant is a current student. If your lender has this requirement, your income must typically meet certain criteria. Normally, your income must be high enough to cover the loan payments and any other major obligations you have (such as rent). In many cases, student loans and other financial aid cannot be counted as income.
   • Whether or not your lender requires you to report income, you will want to create a budget to help determine what kind of auto loan you will ultimately be able to afford. There are online tools available that can help you determine the total cost of owning a particular car, including payments, fuel, maintenance, insurance, etc.
4. Know your credit score. The primary consideration many lenders use to decide whether or not to qualify you for a loan is not your student status, but your credit score. If you have a high credit score, you have better chances of being approved for an auto loan. A good credit score also increases your chances of getting favorable loan terms. You can check your credit score by requesting a report from a credit reporting agency.
   • Credit scores above 700 have a good chance of getting the most favorable interest rates, scores of 600-700 are likely to get reasonable interest rates, and scores lower than 600 are likely to lead to higher interest rates.
   • The Federal Trade Commission (FTC) permits each consumer to receive a free credit report from each of the major credit reporting agencies (Equifax, Experian, and TransUnion) once per year. These free reports do not include your credit score, however. If you want your credit score included with your report, there will be an associated fee.
   • Even if your credit score is lower than you might like it to be, you may still be approved for a loan, though it will probably have higher financing fees.
   • Many lenders require you to have a certain amount of credit history (such as two years) in order to qualify for an auto loan.
   • If you do not have any credit history, you will most likely need a cosigner for the loan.
5. Research which car(s) you may want to purchase. Many criteria can be factored into the decision to purchase a car. In any case, you will want to find a balance between finding a car that you want and one that you can afford.
   • Consider all potential costs when deciding which car to purchase, including fuel, maintenance, and insurance costs.
   • You can purchase a used car or a new car. Interest rates, down payments, and other financial considerations can vary widely. You can likely find a used car for less than the price of a new car of the same model. However, some new cars are more affordable than some used cars. New cars may also come with maintenance plans or other benefits that can lower your overall costs of owning the vehicle.

Applying for the Loan

1. Visit a bank to ask about auto loans. Many banks offer auto loans, and you can ask them about what they can offer you. Make sure to mention that you are student, to see what special options might be available to you.
   • One advantage of visiting a bank before shopping for a car is that you can be pre-approved for a loan up to a certain amount. This can make the buying process easier because you will have an idea of what you can spend, and the dealer will know that the bank as already agreed to offer a loan.
   • Banks will need certain information from you so that you can apply for a loan, such as your Social Security Number, employer’s name, your monthly income, etc.
2. Visit an auto dealer. You can go shopping for a car before or after you have applied for an auto loan. Many car dealers have existing relationships with lenders, and can help you through the application process.
3. Shop around. Whether you are looking at getting an auto loan through a bank or through a car dealer, it can be a good idea to ask several different locations for information about loans. Banks and car dealers compete with each other, so shopping around can help you get a good deal.
4. Check and see if there are loan limits. Some student auto loans have upper or lower limits on the amount you can be approved for. If the cost of the car you are thinking about purchasing is outside the limits (if any) of a particular loan, you will need to look for either a different car or a different loan.
5. Ask about down payments. In some cases, as a student applicant, you may be able to get a loan that will finance up to 100% of the value of the car (or an upper loan limit, if the loan has one). In other cases, you may have to provide a down payment that may vary based on the terms of the loan and/or the value of the car.
   • The size of your down payment, if any, can effect the cost of your auto loan: paying a larger down payment can lower your monthly payments and perhaps the interest on the loan, while a lower down payment will decrease your up front costs for getting the car.
   • You may be able to get a lower interest rate on your loan if you agree to make a larger down payment.

Negotiating the Loan Terms

1. Ask about interest discounts. As a student applicant for a loan, you may be able to get a reduction in the loan’s interest rate, which can save you money. Even if an auto loan is not specifically advertised as a “student” loan, you might still be able to get a discount like this if you ask about one.
   • Remember to ask about student auto loan interest rate reductions based on GPA.
2. Ask your bank for special offers. If you are a customer of the bank you are thinking getting an auto loan from, ask if there are any special discounts on interest rates or fees for current customers. Even small savings can add up over the term of the loan.
   • Some banks have special relationships with particular educational institutions. Tell the lender which school you are attending, and ask if there are any associated discounts or special offers.
3. Ask if the loan term is flexible. The length of some loans can be extended, lowering the amount of each payment. For example, if an auto loan normally has payments of $300 a month for 60 months, you might be able to extend the terms to 72 months and pay $260 month. Choosing this option means it will take longer to pay off the car, but the monthly payments might be more affordable. Some lenders will offer this option to student applicants.
   • Extending the loan term will in most cases increase your finance charges, so that the total amount you will end up paying for the car is more than with a standard term loan for the same car. If you choose a loan term extension option, try to get the lowest interest rate you can.
4. Ask about discounts for automatic payments. Many lenders now offer a small reduction (such as 0.50%) in the interest rate of an auto loan if the applicant agrees to have the loan payments automatically deducted from an account. While the interest rate reduction might not seem like much, it can save you money over the entire loan term.

Seeking other Loan Options

1. Consider a “grad loan.” Some lenders will have special loans available for graduating or recently graduated students. These loans might be available for students who have little or not credit history, and they might offer beneficial terms. If you are not approved for another student auto loan, cannot find one with good terms, or just want to take advantage of a good deal, you might consider delaying getting an auto loan until you are able to qualify for a grad loan.
2. Avoid using a student loan to purchase a car. Students often have easier access to student loans than other sources of financing, which can make one seem like a good option for paying for a car. However, student loans often have substantially higher interest rates than auto loans. Many student loans only allow you to use the funds for qualified educational expenses such as tuition, textbooks, and room and board, so these cannot be used to purchase a car anyway.
   • If you are seeking other options for paying for an auto loan, talk to your school’s financial aid officer for advice. He or she may know of good offers that are available in your community.
3. Consider getting a cosigner. If you have no credit or are having difficulty finding an auto loan with favorable terms, you can ask someone (such as a parent) with established credit to cosign a loan with you. A cosigner agrees to share with you the legal responsibility for paying back the loan. This support can convince the lender to give you a more favorable loan, or a loan at all.
   • A cosigner is legally obligated in most cases to pay back the loan if you are unable to, so think of a potential cosigner who is someone you trust and have a good relationship with.
   • Taking out a cosigned loan will affect your credit and your cosigner’s.
   • If you get a loan with a cosigner’s help, be diligent about paying back the loan. Defaulting on it will harm your credit and the cosigner’s, and potentially damage your relationship.

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Sources and Citations

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