While college can be the best four years of your life (or five…or six…or more), it can also be a stressful time for many students as far as the financial implications go.
College students often have to take out a significant student loan to cover tuition, room, and board. And that doesn’t even include other expenses, like transportation needs.
While it is common for students to work, holding down part-time and sometimes even full-time jobs during college, it can be difficult to manage expenses on top of the stress of studying and attending classes.
If a student needs a car to get to and from work and classes, they may need a car loan to make this possible. While it may not be easy to acquire an auto loan as a student, the good news is that it is indeed possible.
Read on to learn more about how you can get approved for a car loan while in college.
Car Loans: The Basics
Car loans are part of a group of loans known as secured loans. A secured loan is one that involves collateral: in this case, the collateral is the automobile itself.
This is different from a typical private student loan. In a secured loan, the lender has the right to your collateral if you do not pay off your debt.
When borrowers find themselves struggling to make a monthly payment and are unable to pay off their debt in their loan term, automobiles are then repossessed by the lender.
A car loan is also a closed-end loan, which means there is a fixed amount of money associated with the purchase of the car and then it is paid back in monthly installments with interest.
These loans have specific time periods, with longer-term loans resulting in smaller monthly payments, but more interest paid overall. Shorter loans are the exact opposite: the monthly payments will be more expensive, but you will pay less interest over the life of the loan.
Car Loans for Students: The Challenges
Students seeking a student auto loan to purchase an automobile are likely to encounter any one of these challenges, if not all of them.
Lack of Credit History
Lenders use credit history as one of the primary ways to assess whether a borrower is likely to default on a loan. College students, who are typically between 18 and 22 years old, have not had enough time to build up a solid credit history or a good credit score.
Therefore, lenders have little to go on in terms of assessing the students’ likely behavior as borrowers.
This does not mean they will always be rejected; in some cases, loans for college students focus more on GPA and employment rather than having good credit or bad credit.
Lack of and/or Limited Income
While enrolled in full-time courses, college students are limited in the number of hours they can work. Therefore, the earning potential for a student is significantly less than a person working full-time after graduation.
Income is another important consideration for lenders, which is why it can be difficult to approve loans when the borrower has only a modest amount of money coming in through a job. Having a solid income to make your car payment is a necessity for most lenders.
Interest Rate Roadblocks
When a car loan for a college student is approved, the interest rates can feel unmanageably high. Strong credit scores and solid credit histories bring interest rates down, and students, unfortunately, do not bring these to the table.
In order to avoid an interest rate that could make your loan practically impossible to pay off, students should look at lenders who have GPA incentives. In these types of student car loans, you may receive discounts or a lower interest rate for maintaining a particular GPA.
Limited Loan Amounts
Because college students seeking car loans typically have limited credit history and income, there is a relatively conservative cap placed on loan amounts.
A college student car loan will probably have a maximum amount of $15,000 to $20,000, which limits the type of car a student may be able to purchase.
Used cars in the U.S. cost around $21,000 on average, and new cars are now averaging $40,000 or more. Students who are able to secure car loans will need to be extremely budget-conscious while auto shopping and car financing.
How to Improve Your Chances When it Comes to Student Car Loans
Students are up against many challenges, as we outlined above. Thankfully, there are some proactive steps students can take to increase your chances of being approved for a car loan.
Save, Save, Save
Try to put away as much money as you can from whatever income stream you have during college. This could be a waitstaff position, a part-time campus job, or even odd jobs like babysitting and tutoring. The more you can save for a down payment on a car, the less you will be seeking from a lender.
One tip for earning income every college student should consider: investigate the possibility of paid internships in your field of study. That way you are earning money for a down payment on a car as well as a valuable experience that could help you land a dream job as a recent college graduate.
Build Your Credit
While your parents may have sent you off to school with a healthy fear of credit cards and debt, the fact is you will need to start using a credit card at some point for the simple purpose of building credit. Becoming an authorized user on a family card may help you build credit or you could look at a secured credit card with a small deposit.
Hit the Books
A strong GPA can help student borrowers in two ways. The lender may check your GPA while reviewing your loan application (which will give them a sense of your ability to manage responsibilities and ultimately graduate and move into a full-time career). Your GPA could also help you qualify for certain loan discounts, which could lower the amount of interest you pay over time.
Use a Co-signer
Your ability to secure a car loan while in college may be contingent upon a co-signer—someone willing to attach their name to the loan, which also means they are on the hook financially if you do not pay it back in time. Having a creditworthy cosigner can open up many new loan options for students.
If you take these steps to position yourself in a favorable light with lenders, you will significantly increase your chances of securing a car loan.