Students depend on reliable transportation to campus and work, for recreation, and for visits home. Getting a car loan as a student is possible, but you may face some challenges that other borrowers might not have to deal with. If you’re shopping for a car as a student, it’s important to understand your options as someone with likely low credit and salary.
How Does a Car Loan Approval Process 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. How much money you borrow, how much time you take to pay it back and your interest rate all affect the size of your monthly payment. There isn’t any one specific way to determine the best car loan. It’s important to take the time to understand how auto loans work and make the best decision for your unique financial situation.
What Can A Student Do to Improve Their Chances for Approval?
The following steps outline how to get a car loan approval as a student:
- Build Your Credit – You can do this by applying for a starter credit card, like a secured credit card or student credit card. Making on-time payments and keeping balances low will help you establish your creditworthiness.
- Get a Co-Signer With Good Credit Rating – It may not be ideal, but having someone with good credit, like a parent or guardian, sign on the dotted line with you will likely make an auto lender more apt to extend financing. Just remember, the cosigner will be held liable for the loan, and any missed payments will also affect their credit score, so if you’re going to go this route, be sure all parties are the same page.
- Provide References – Most lenders now want personal references when it comes to guaranteed approval auto loans. Usually, these references are varied, while other times they will simply be used as another means of contacting you should a problem arise with the loan. The general feeling among lenders is that they’ll not have to use this information, but it is certainly helpful to them should the need arise.
Save for a Large Down Payment – The more money you can put down upfront, the lower your monthly payments will be and the less risk you might pose to lenders — and your own budget.
- Secure Steady Income – Getting a steady income is crucial to getting a car loan on your own. Lenders want to see that you make enough money to repay your loan on time, while meeting your other debt obligations.
- Choose an Affordable 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.
- Use a Credit-Builder Loan – Credit-builder loans are typically offered by small financial institutions, such as credit unions and community banks. When you get a credit-builder loan, the money you agree to borrow is deposited into a bank account held by the lender. You’ll then make monthly principal and interest payments — which are reported to credit bureaus — for a term usually around six to 24 months. When the loan is paid off, you get the money from the account.
- Become an Authorized User – Become an authorized user on someone else’s credit card may also help you build your credit. That’s because their use of the card may be reported to the credit bureaus for you as well.
- Shop Around – Be sure to vet any lender properly before filling out applications — and read the fine print so you know all the costs associated with an offer.
The Bottom Line
It might not be easy to secure a car loan as a student, but it is possible. Improve your chances for car loan approval as a student by building your credit, doing proper research, budgeting and getting a stable job.