Navigating car loans for students

As a student, you may want to buy a car for a variety of reasons — commuting to campus, getting to work and your ability to drive home for the holidays can all play a role in your decision. Car loans for students typically have a similar process as any other car loan but may feature some additional caveats. Let's find out more about how you might navigate a car loan as a student.

Student car loans: The basics

Understanding how auto loans work and the costs associated with borrowing can go a long way toward your decision to apply for a car loan, especially if this is your first time buying a car. As a student, you could be facing a plethora of expenses you aren’t used to managing. Dining hall passes, room and board, tuition and books are all costs that can add up quickly — how would adding an additional monthly payment impact your budget?

When weighing your options, consider asking yourself how important it is for you to have access to a vehicle. For instance, if you work off-campus, having a vehicle may be essential to get to your job. If you work on-campus or are focused solely on your studies, a car may be optional. Do you have reliable public transportation available? Could you use a bike or walk instead of driving?

Keep in mind that the monthly cost of your auto loan is only one variable in the total cost of a vehicle. You will also want to factor in how other expenses such as, but not limited to, gas, insurance and maintenance will fit within your budget.

How auto loans for students work

Car loans for students work largely the same way as car loans for anyone else. When you take out an auto loan, you sign a contract to borrow a fixed amount of money from a lender and repay them, with added interest, in monthly payments throughout the term of the loan. If you’re approved for an auto loan, your monthly car payment has these features and associated costs:

• Principal: The total amount you’re asking to borrow to purchase a vehicle, which may be the full vehicle price or a portion of it if you plan to make a down payment.
• Interest: The rate charged on the principal amount you borrow, set by your lender. Higher interest rates typically translate to a higher monthly payment, and lenders look at variables such as your credit history to determine your rate.
• Loan term: The length of your auto loan, typically expressed as the number of months you’ll be paying down your loan (for example: 36 months, 48 months, 60 months etc.)
• Fees and taxes: Any fees and taxes associated with the sale, such as dealer’s administrative fees, registration fees and sales taxes. You may have the option to tack these onto your financing or pay them upfront. If you choose to lump them onto your monthly payments, be aware that you’ll now be paying interest on these costs on top of your principal.
• APR (Annual Percentage Rate): This represents the total cost of borrowing, including certain fees, expressed as an annual rate. Note: There is a difference between interest rates and APR, and taking the time to understand how APR is calculated can be beneficial to understanding your potential total cost.
• Insurance: Although insurance is technically separate from your monthly car loan payments, your loan may impact your insurance cost. That’s because lenders may require you to get additional coverages like comprehensive insurance, which can add an extra cost to your budget.

It additionally is worth remembering that car loans for students are secured loans that use your car as collateral, so before signing on the dotted line, you may want to be sure your monthly payment fits into your budget.  Missing payments could cause your lender to repossess the car if you fall behind.

Unique challenges students face

While there may be car loans out there that are geared toward college students, you could face some hurdles since auto loan lenders typically look at credit score and income as primary factors in their decision. If you’re trying to get a car loan as a student, you may not have had time to build up your credit or have much employment history as you focus on your studies. While this might play a role in your ability to qualify for an auto loan, there are steps you can take to improve your chances. Either way, you may face some of the following issues:

Limited credit history

Financial institutions want to be reasonably confident that you’ll pay your loan in a timely manner. Because of this, credit scores are an important factor in your loan eligibility. As a student, you may have never used credit before, or you might not have enough credit to establish a consistent payment history to lenders.

Income limitations

As a student, you may have a part-time or full-time job, or be focusing solely on your studies. Either way, you might find yourself with minimal income — which could be an issue since it’s a factor that lenders use to determine your financing eligibility. When looking at car loans for students with low income, current employment and employment history are both usually considered. Having a low income along with a short employment history may potentially affect your chances of approval.

Potential for higher interest rates

Typically, car loan applicants with stronger credit scores and employment history receive lower interest rates. As a result, car loans for college students may be tied to higher interest rates which have the potential to make your monthly payments higher.

Additional tips for getting a car loan as a student

Although there can be some unique challenges to getting a car loan as a student, it’s certainly not impossible. Luckily, there are actions you can take to improve your chances of approval or to reduce your monthly payment. Here are some tips to improve your chances of getting a car loan as a student.

Look into student car loan programs

It may benefit you to shop around and see if any lenders offer discounts or incentives to current or recently graduated students. Whether it’s a rebate or a lower interest rate offer, it might prove useful to research and see what you’re able to find.

Build your credit

Establishing a healthy credit score isn’t something you can do at the snap of your fingers — it can take some time, especially as a young adult. You may be able to buy a car with bad credit, but taking steps to improve your credit can go a long way in improving your financing options for the long run.

Improve your grades

Some car lenders may offer a student discount on your interest rate or total monthly payment if you keep your grades above a certain threshold. For this type of discount, your lender may request your transcripts each semester to see if your grades have changed.

Make a large down payment

The more you put down as a down payment, the less you’ll need to borrow, which may increase your likelihood of getting approved for a car loan as a student. 

Consider a more affordable vehicle

Since your principal amount is included in your auto loan calculation, finding a less expensive car and lowering the amount you’re borrowing may improve your approval ability and lower monthly payments. Consider ways to find an affordable car, or look into buying a used car vs. a new one.

Consider a co-signer

You may not be able to qualify on your own for an auto loan despite your best efforts to improve your financing chances. In this case, you might be able to secure a co-signer who agrees to repay the debt if you’re unable to. Keep in mind, your co-signer's credit will be on the hook just like yours, and your actions may directly impact them if you miss monthly payments.

Establish a steady income source

A lender is less likely to grant you a loan if you’re unable to prove you can afford it. Being able to show a steady income source may be one way to show your lender that you’ll be able to meet your debt obligations.

International student car loan options

Some lenders may offer international students car loans; however, they could have unique requirements you might want to consider such as:

The length of repayment: You may not be approved for a loan if the payment term extends past your legal stay in the U.S.

Residency requirements: Auto lenders that work with international students may accept a different variety of visas — be sure to check with your lender that your documentation is sufficient.

Cosigner options: While having a cosigner could help you qualify for an auto loan, there are lenders that may not allow for one, as well as some that could require cosigners to be a permanent U.S. resident.

Check your credit history: As an international student, you may not have any credit history or social security number. However, lenders may still check your credit file to see if you have any negative remarks (like bankruptcy or debts in collections) in your credit history.

See if you prequalify

Last, you can check to see if you can be prequalified for financing. When you’re prequalified, lenders provide an estimate of what you may qualify for and what your monthly payment might look like based on your financial details. This can be useful to see if getting a car loan as a student is a feasible option for you. Just remember that prequalification doesn’t equate to approval, and you’ll still need to formally apply with your lender. Additionally, you could use a car payment calculator to check your potential financing options and get an idea of what you may be paying monthly.

In summary

Car loans for students take some extra planning, but you still have options available as a college student. Taking out an auto loan is a big decision, so before you make your move, it could pay to carefully consider your budget and how a car fits into your lifestyle. If you’re worried about your loan options, remember that there are steps you can take to improve your chances of approval, and scoping out potential student car loan programs might help you take advantage of any offers at your disposal.