While many college students live on campus and have little need for a car while in school, others require reliable transportation to travel to and from campus if they live elsewhere, from campus to a job site, or even to make regular trips back home on the weekends.
But trying to secure a car loan while in college comes with challenges. After all, to lend you money, banks want to know that you can reliably pay it back. But many college students don’t have consistent incomes or much of a credit history.
In this article, we outline the details of how car loans work, why it can be challenging to get one as a student, and provide you with some tricks and tips to make it all work out.
When someone wants to purchase a car but can’t pay for it all upfront (which is most people), they have to take out a loan. Sometimes, this loan is through the car dealership or a bank or another lending institution.
Banks and other lenders agree to lend you money because it benefits them in some way. By lending you money and charging you interest as you pay it back, they can make a little extra. If you fail to pay it back, however, they lose out. Because of this, they want to verify that you are likely to repay what you’ve borrowed before they will lend to you.
This is done by doing a credit check, where they see your credit history and determine whether you have been responsible with loans and credit in the past (an indicator that you are likely to do the same in the future). They also like to know that you have a reliable source of income that is large enough to cover all of your other expenses and this new loan payment.
The amount of the loan you get approved for will depend on these factors, as the lender needs to be careful about how much risk to assume.
When it comes to car loans, these are considered secured loans, which means there is some physical item of value tied to the loan: the car. Because of this, the bank or lender has a way of recouping funds if you fail to pay. That is, they can take repossession of the car.
Secured loans will often have lower interest rates than unsecured loans. For this reason, the lender has the possibility of making back some or all of the unpaid loan value by taking possession of the security and selling it.
When you are granted a car loan, the repayment terms usually consist of a fixed interest rate for a short number of years — anywhere from two to eight years is common. You will make fixed monthly payments for the specified amount of time, after which you will officially own your car outright, and the bank or lender will send you the car title.
There are many reasons car loans might be difficult to get as a student. Among these are:
As a student, you may only qualify for high-interest loans or smaller loans. This is why it is important to shop around for the best deal. A high-interest loan can wreak havoc on your finances.
Good interest rates start at around 3%. You start getting into bad interest rate territory if you go beyond double that number, and it’s really not advisable to end up with a double-digit interest rate.
The good news is that there are ways to improve your odds of getting a good car loan as a student. Among these are:
When it comes to buying a car, negotiation is key. The dealer will have a sticker price on a car, but this can almost always be negotiated down.
For example, you can negotiate the price of the car you are trading in if you have a trade-in. By raising the trade-in value, it lowers the total amount you will pay. You can also check the quoted price and see if the dealership has included any add-on fees. Ask them about each one and see if any can be removed.
There is also a difference between MSRP, invoice price, and the actual dealer cost of a car. The MSRP is the suggested retail price. The invoice price is the amount the dealership paid for the car. It’s a good number to know when you are asking for a lower price.
Keep in mind that many dealers get additional kickbacks based on how much they sell each month, so they often pay less than what is on the invoice price in the end, and you can sometimes negotiate lower than the invoice, especially if it is near the end of the month, and they are trying to reach a sales quota.
When it comes to the car loan, always make a point of shopping for different lenders to find the best rate. Consider doing this even before setting foot on a dealer’s lot. If you can show up with a preapproval offer, you will already have a good handle on your price range.
As you plan to buy a car, it’s always a good idea to plan for all associated expenses. Not only will you now have a monthly car payment to add to your budget, but also you should account for the following:
Also, be sure to consider how car payments will combine with student loan payments if you are still making them after graduation.
As a final word of advice, it is generally not advisable to purchase a car with student loans. Not only is it potentially illegal to do so, especially if your student loans are federal, but also it is really bad financially.
The reason that car loan terms are usually shorter than federal student loan terms is that cars depreciate. By funding your car with a student loan, you won’t even start paying it off until after you graduate, and you will likely be paying it off for 10 years at a minimum. This is long after most people have moved to their next vehicle.
The odds are that you will be paying this car off long after you purchase your next car, and the total interest you end up paying by the time it is all said and done can end up being more than the car’s sale price initially.
Keeping on top of your finances and making informed choices will help you not only while you are in school but also long after you graduate. The team at CollegeFinance.com aims to provide you with all of the information and data you need to do so. Consider signing up for our newsletter to get updates in your inbox.