If you’re in college and need a car, you’re not alone. Every year, thousands of students seek to purchase their first automobiles, often without sufficient understanding of the process that can be unique for students.
While getting an auto loan as a student is possible, you may face some challenges that other borrowers might not have to deal with, such as having no money, no income, and no credit history.
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How Does a Car Loan Work?
Car loans are closed-end loans. That means you’ll borrow a fixed amount of money to finance your car purchase and then repay it, with interest, in equal monthly payments for the life of the loan. Longer loan terms can mean a lower monthly car payment (but more interest paid overall). Shorter loan terms can mean a higher monthly car payment (but less interest paid overall).
An auto loan is also a secured loan, meaning your car is used as collateral. So if you don’t make your payments on time and end up defaulting on your loan, the lender typically has the right to repossess your car as payment for the outstanding debt. That’s why it’s important to make sure you can afford your loan payments, on top of your other expenses, before applying for a car loan.
Some lenders offering student car loans cap the loan’s amount. Maximum amounts for students maybe around $15,000 to $20,000 (CAD), which could limit the type of car you can buy — unless you have a hefty down payment saved up.
Why Car Loans for College Students are Hard to Get Approved for
College students must contend with some unique circumstances that make an auto loan approval process challenging. Many students have no credit record, little savings, spotty income, and scant employment history.
Your credit history reports all credit-related activity, and if you’ve never used credit, you probably lack a credit history report. You have a better chance with lenders if you already have a credit card and you’ve used it wisely – no late payments, no large unpaid balances, or avoidance of minimum payments.
Nevertheless, many lenders have student auto loan programs that help get to the final signature on an application.
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How Might College Students Improve Their Chances?
Here are 10 tips for securing car loans for students:
- Get a student credit card: These are cards offered by your school in conjunction with a lender. They are secured, meaning you have to keep some money in the bank to collateralize the card.
- Get a co-signer: Your parents, friends, and relatives have helped you so much already, maybe one will be willing to co-sign for the auto loan. Having a co-signer really improves your chances for approval and could let you access some of the best auto loan rates.
- Supply references: Have your teachers, administrators, guidance counselors, and other grown-ups vouch for you in writing. Don’t be shy, supply about half a dozen glowing recommendations.
- Save up a sizable down payment: The more you put down, the less you need to borrow. Smaller loans are easier to approve. Don’t forget, the car acts as collateral. When you’ve already put down a nice chunk of money, you’ve over collateralized the loan which makes lenders happy.
- Earn money: It would be ideal if you could earn roughly $1,500 a month. You might be able to arrange a college work/study job. A steady income demonstrates your ability to make your car payments on time.
- Choose an affordable car: Save the new Lexus or Mercedes-Benz for your second car. Look for a quality used a car, or if your heart is set on a new car, aim for an economic model with modest monthly payments. Many dealers offer special programs for students and recent graduates, so inquire about these.
Do not use student loan money to pay for a car: Student loans usually have higher interest rates than car loans, plus you need your student loan money for, well, school.
- Use Credit Builder: Many credit unions have programs called credit builder loans that can help you establish a credit score. With a credit builder loan, you borrow a modest amount which gets deposited into an account. When you pay off the loan, the account is released.
- Become an authorized user on another person’s credit card: The use of the card will be reported on your credit report and that of the owner. When the card is used responsibly, your credit score should climb.
- Finally, research the right way to buy a car – auto dealers can be quite clever, but there are many online resources to help you get a good deal. Also, be on the lookout for used-car scams.
It’s possible to get a student car loan. But if you don’t have an established credit history and a steady source of income, it might not be easy.
Take some time to shop around. Loan requirements and interest rates vary from lender to lender. Doing your research can help you find the lowest interest rate available to you, which can save you money over the life of your loan.
If you’re unable to qualify for a loan with an affordable interest rate, it may be better to wait until you’ve had a chance to build your credit, save up for a down payment, or secure a job. But if you need a car now, consider a less-expensive vehicle, and then budget well so that you can pay off your loan as quickly as possible.