As a student, you might be wondering, can I get a car loan? The short answer is yes, but you will need to have good credit and steady income. Without these two things, it can be a challenge to get approved. After all, if you step into the lender’s shoes, you can easily understand why a student is a riskier loan candidate when compared to other borrowers. The good news is the road doesn’t end here, with a few extra steps you can get approved as you’ll see below.
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The Mechanics of a Car Loan
When you obtain a car loan, you are extended the amount of money you need to purchase the car you want. Once the purchase is finalized, you start making payments toward the loan which includes both principal and interest payments. This is standard for virtually any car loan.
What differs from car loan to car loan is the length of the term. A longer loan term is favourable if you want lower monthly payments, but you will end up paying more interest. A shorter loan term is favourable if you can afford the higher payments and want to avoid hefty interest. Fortunately, loan terms aren’t set in stone. If you want a lower monthly payment now since you’re a student, you can always refinance the car later when you have more income, if you want to shorten the term (for more information about auto loan refinancing, click here).
Finally, car loans are typically a secured form of financing. In other words, your car is used as collateral for the loan. This means that in the event that you default on the loan the lender can seize your car and sell it to cover the outstanding amount of your loan. As a student, it is important to ensure that you can afford the cost of a car, particularly given your large education expenses, because you want to avoid having your car repossessed by the lender.
Limitations of Car Loans for Students
When applying for a car loan, your credit and income are definitely going to be assessed by the lender. Many students are beginning their journey to financial independence, as a result, being strong in these two categories can be a challenge. That being said, everyone starts somewhere. If you know what your limitations are ahead of time, you can devise a plan to work around the roadblocks.
Naturally, as a student, your focus is on school, not work, as it should be. However, without strong, steady income, you are not considered to be a favourable candidate in the eyes of lenders.
Credit history is the biggest contributor to your credit score’s calculation. This is because lenders want to have reasonable assurance that you will make payments on time and in full.
As a student, your credit history might be non-existent, only cover a short period of time or be poor as a result of past financial problems. Regardless of your credit status, you should definitely know what it is before you apply to manage your expectations. Keep in mind that there is no minimum credit score for car loans, but lenders usually want to see a score of 650 or higher.
Learn more about how your credit history affects the health of your credit score, click here.
There is usually a threshold on how much a student can borrow to purchase a car. Maximum loan amounts tend to be around $15,000 or $20,000. Unfortunately, this means if you have your eye on the newest car, you may have to look for something cheaper.
Inflated Interest Rates
As we saw above, students are not always the most ideal candidates for car loans because of their low income and lack of credit history. If a student overcomes these issues, they will certainly pay the price in the form of inflated interest rates. Students are considered to be riskier borrowers so lenders tend to charge higher interest rates.
The good news is that some lenders offer discounts for students, some of which are based on GPAs. These discounts could help you save on the cost of the loan and interest.
Working Around Limitations as a Student
Now that you understand the limitations of obtaining a car loan as a student, it’s time to learn how to work around those limitations. Below are ways that you can improve your situation to seem more favourable in the eyes of lenders.
Work on Your Credit
Building a credit history and making credit improvements can take time, but everyone must start somewhere. Thankfully, many institutions offer products that help individuals establish and rebuild their credit. These types of products tend to show up on your credit report after a month, which is a relatively short period of time, but this can vary. The key is to make payments on time and in full, otherwise, you’ll dig yourself into a bigger hole.
Another thing you can do is become an authorized user on someone else’s account or credit card. Even if you don’t use the account, the account will still show on your credit report. Keep in mind that the cardholder you reach out to should be responsible with their credit. If they aren’t, their poor financial habits will reflect on your credit report which won’t get you where you want to be. It’s best to ask someone you trust and know well, such as a friend or family member.
Find an Income Source
When it comes to car loans, credit isn’t everything. Lenders will want to ensure that you have enough income to make payments. Securing a steady income source is a great way to better your odds of approval.
Save Up For a Down Payment
The more you put down on a car, the less you will need to borrow (click here for more information about down payments on auto loans). Not only will it be easier to secure financing, but your payments will also be lower because you’re financing less. As a benchmark, 10% to 25% is a reasonable down payment for most students. Furthermore, some car loan lenders require this down payment range when working with a student.
Avoid Numerous Applications
The more you apply for financing, the more your credit score will take a slight hit. Every time you apply for a car loan, the lender will pull your credit report which negatively impacts your credit score. That being said, it is wise to obtain a couple of financing offers before picking one to ensure you get the best deal.
Use a Cosigner
A cosigner agrees to repay a loan in the event that the primary borrower defaults. Lenders will be more likely to extend money to you with a cosigner because they will still get paid if you default.
While this is advantageous to you, the cosigner is incurring some risk because the loan will reflect on their credit report and they may not be able to easily afford your loan. Be sure to consider this before asking someone to be your cosigner.
For more information about what it means to have a cosigner, check out this article.
Before you start shopping and become committed to a certain car, it is a good idea to get pre-approved. When you’re pre-approved, you will know exactly how much you can afford on a car when shopping. This will also alleviate some stress around purchasing a car because you’ll know that you’re already pre-approved for financing.
Keep Your Grades Up
As mentioned, some car loan lenders offer discounts to borrowers, some of which are based on your GPA. Even if there isn’t a discount involved, lenders might consider your grades anyway during the application process. Either way, it pays off to keep your grades up.
It is entirely possible for students to obtain financing for a car, they simply have to work a little harder and smarter to ensure they get approved. Once you obtain a car loan, it will help you build your credit further, so long as you manage the debt responsibly, giving you a kick start on your financial future.
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