Can college students get car loans?
Yes, college students can get car loans. Some financial institutions have special student auto financing programs to meet a college student's unique needs. However, whether you finance a new or used car or lease a vehicle, students must meet special considerations and requirements before a finance company approves your loan. Consider your credit score, income, whether you have saved for a down payment, whether the loan terms fit your budget, and whether having a cosigner will improve your chances of getting your student auto loan approved.
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How to improve your chances of getting a car loan as a college student
If you're a student who wants to get approval for a car loan, an important requirement is to demonstrate financial responsibility and stable employment to prospective lenders. Consider these strategies as you prepare to apply for student auto financing:
Check your credit score
If your credit score isn't in great shape, your first step is to work on building it up. In the FICO® scoring system, credit scores range from 300-850. As your credit score increases, so do your chances of getting loan approval and more favorable interest rates, according to Experian. Paying your bills on time is a great way to improve your credit score. Pay down existing debt and clear up late bills before applying for a loan.
Becoming an authorized user on another person's credit card (who has good credit) can help boost your credit score. When the credit bureaus report on their use of the card, it's also attributed to your credit score if the credit card issuer reports for authorized users.
Have stable income
Having a steady job or a consistent source of income that will cover your monthly payments demonstrates your ability to manage paying off the loan.
Save for a down payment
The larger the down payment, the less money you'll need to borrow, which lowers your risk to the lender. Between 10-20% of the purchase price is the range of what you might offer as a down payment on a car loan, according to Capital One.
Choose a vehicle you can afford
Choose a budget-friendly vehicle rather than a high-end model. The payments will be lower, and you're more likely to be approved for a smaller loan.
Shop around for the best interest rates
Check different lenders that offer auto loans for students. Look at banks, credit unions, and online lenders to find the best interest rates and terms for you.
Get a cosigner
One of the best ways to get approved for student auto loans is to have a cosigner. A cosigner can be a parent, relative, or another adult with established good credit who agrees to apply for the loan with you. Be aware that if you can't repay the loan, your cosigner is also responsible for the balance, and any delinquent loan payments could negatively affect both your credit scores. Learn more about what you can afford by using our car loan calculator.
Pro tip:
Consider both the monthly cost and the length of your loan when deciding which car loan is the best for you. Consumer Reports has a chart showing the differences between the loan length in years and the amount of interest you'll pay altogether.
Can a college student get a car loan without a cosigner?
Yes. With an adequate credit score and reliable income, a college student could get approved for a car loan without a co-signer. But beware. If you have a limited credit history, you may pay high interest rates, which could make it challenging to afford the monthly payment, and you'll end up paying more for the car than it's probably worth.
Is it hard to get a car loan with student loans?
Having student loans can make it difficult to get approved for a car loan only if you haven't been making your payments on time. Paying your student loans on time helps increase your credit score, demonstrating to potential lenders that you have been financially responsible.
Having student loans will affect your budget and have an impact on your debt-to-income ratio (DTI). Your DTI is a financial measure that compares the amount of debt you have each month to your gross monthly income. Lenders use this ratio to assess your ability to manage the monthly payments you already have and repay your debts. TransUnion reports that a "good" DTI to qualify for a car loan is about 35% or lower. If your DTI, including your student loan payments, is 35% or lower, it should not impact your ability to get a car loan.
Can student loans be used for a car?
No. You can't use federal student loans to buy a car. If you have private student loans, contact your lender or read the promissory note you signed to see if using student loan funds to buy a car is permissible.
What are the consequences of using student loan funds to buy a car?
You sign a loan agreement in which you are agreeing to use the funds for your education expenses when you get your student loan. Misuse of the funds could result in the U.S. Department of Education canceling your loan and demanding that you pay back the loan immediately. You can find more details about using federal student loan funds in the Student Aid Handbook. Private lenders will have individual policies for handling misuse of student loan funds.
Pro tip:
Some lenders will offer discount interest rates on auto loans for students with high grade point averages, so spending more time in the library could translate into financial benefits.
Should I lease or buy a car as a college student?
Leasing a car is essentially a long-term rental, typically around three years, with set limits on mileage and wear. While you wouldn't gain the advantages of car ownership, getting an affordable short-term lease might be a good option, especially in a tight car market where used car prices are high. If you choose this option, read the contract carefully and understand the fees.
Buying a new car has potential benefits. The loan for a new or used vehicle could end up costing you less overall than an equivalent lease. Ownership also allows you to maximize the car's value, and you won't risk paying the penalty for excessive mileage. When looking into a new versus used vehicle, compare their warranties, fuel efficiencies, car insurance premiums, and expected repairs or maintenance costs.
Buying or leasing a car each has its own benefits and drawbacks. Your situation will dictate which option is best for you.
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