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Student Car Loans: A How-To Guide
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Getting a quality car while you’re in school — or still paying student loans — can be challenging. Car loans for students may be hard to find as you build your credit history. Some credit unions and many automakers offer special student car loan programs featuring rebates and competitive interest rates. But these aren’t your only choices to get the transportation you might need for going to class, visiting home or starting a new job.
The basics of student car loans
Today’s students are often faced with a double bind when it comes to finances. On top of borrowing for their education, they may need to borrow for a car, too. The good news is that even students with existing debt and little credit history could nail down financing for a new or used car through a lender that specifically offers student car loans.
Manufacturer financing vs. rebates
Carmakers are able to offer special financing, as well as rebates, on their own vehicles. Rebates are for a set amount of money (typically $500 for students) off the price of a new car. Ford Drives U, for example, offers a $500 rebate off a 2019, 2020 or 2021 vehicle, reducing the amount you need to borrow. Financing or leasing incentives usually involve low or zero-percent APRs or reduced monthly payments, also typically for new vehicles.
Here’s a sampling of manufacturer programs for students:
- GM College Discount: This program applies to Chevrolet, Buick and GMC vehicles and offers price discounts and deferred payments. You might be able to combine those offers with low financing offers available in your area.
- Nissan College Grad Program: Some manufacturers allow current students, as well as recent graduates, to participate in their student programs. Nissan rewards specifically recent or upcoming grads with price discounts and a 90-day deferment on the first payment.
- Toyota College Grad Program: Toyota offers a $500 rebate to upcoming and recent grads. It also promises competitive APRs or lease terms.
- Honda Graduate Program: Honda not only defers payments for three months, the first 60 days are interest-free. Note, however, that deferral means you’re postponing payments, not skipping them altogether. In other words, you’ll make those payments at a later date, including interest. Honda takes the bite out of that accumulating interest by pressing pause for two months.
Where else to find student car loans
Banks, such as Capital One and Wells Fargo, usually don’t offer specific car loans for students — however, some credit unions do. Check with your local credit union to see if it offers car loans for college students, including programs that reward a high GPA. Unlike car manufacturers, credit union car loans could be used on virtually any type of car; manufacturer offers would typically only apply to new vehicles and, sometimes, certified pre-owned vehicles.
Are student auto loans a good idea?
Auto loans designed for college students or recent graduates may allow you to qualify for a lower APR than what you might get walking into your neighborhood bank. But there are other ways to get the car you need, even with limited income and little credit. You could consider applying for a traditional car loan with a cosigner. That would give you the ability to shop around with manufacturers, banks, credit unions and online lenders of your choice.
No matter which route you take, it’s important to get more than one auto loan offer so you can compare rates and total costs. A $500 rebate is nice, and so are deferred payments and low APRs. But if a new car isn’t in your budget, a used car with a higher APR may wind up being more affordable overall. This is especially true if you’re still in school.
“Students who must buy a car should sit down and consider their cash flow before searching for vehicles, at all price points,” Pentis said. In fact, students might be “better off buying an old beater, not shiny new wheels.”
How to qualify for a student car loan
First things first: You may not qualify for a manufacturer’s student rebate or financing program with bad credit. While manufacturers understand that students typically have limited credit history, they may not accept adverse credit. In addition to credit information, you may also need to provide:
- School transcript or diploma: Some programs permit all students to apply, while others require proof that you’re within six months of graduating or have graduated within the last two to three years from an accredited college or university, registered nursing program, community college, junior college or technical college or university.
- Paystubs or offer of employment: Some manufacturers want to see how you plan to repay the auto loan or lease with proof of full-time employment or a written commitment from a future employer.
Student auto loans might not apply to just any new car on the lot — they may only be offered on specific vehicles — that means you might have to put any sports car dreams on hold. Mazda, for example, caps the amount students can finance at $25,000, ruling out the 2020 Mazda Miata.
How to apply for student car loans
Step 1. Check your credit
Even if you don’t have a significant credit history, check it to make sure there aren’t any errors dragging your credit score down. You can get free copies of your credit reports at AnnualCreditReport.com.
Step 2. Determine what you can afford
Use an auto loan calculator to make sure car payments fit into your budget. A good rule of thumb is to never buy a car for which payments, insurance and gas would exceed 20% of your income. You’re more likely to be approved for a car loan if the lender can see that you’re able to pay back the loan. A realistic budget can narrow the list of vehicles you look at, making it easier to shop.
step 3. Get a cosigner
A cosigner might not only help you get a car loan as we mentioned earlier, it may be required by your lender in order to get the vehicle or loan type you want. Remember, the credit of both the student and cosigner is affected by the success or failure of making timely payments.
Step 4. Prepare a down payment
While some lenders offer 100% financing on student car loans, other lenders require a minimum down payment. The Acura Graduate Program, for examples, requires a down payment of 5% of the purchase price. Required or not, a down payment could help you be approved for a student auto loan, or get better terms on one, and set you up for success.
Step 5: Gather your school documents
There are the car loan documents everyone needs when applying for a car loan, and then there’s the specific paperwork we mentioned earlier to verify your enrollment, graduation and/or future employment.
Step 6: Pick a few lenders and do the paperwork
The Federal Trade Commission recommends engaging in comparison shopping for loans, so before you go to the dealer, apply to a few lenders. There’s a range of car financing for students with varying requirements and rates, so some due diligence research can pay off. Here are our best auto loan rates in 2020.
How to get a student car loan with bad credit and no cosigner
If you’re having trouble qualifying for any type of student car loan, here are some tips that could help.
Maintain a solid grade point average (GPA)
A GPA of 3.5 or higher will likely help you to qualify for the best student auto loan rates from a credit union. A GPA of less than 2.5 could mean an interest rate greater than 10%.
Have a reliable source of income
If you’re close to graduation, a verifiable job offer showing a start date within 90 to 120 days might help offset poor credit. If you’re a current student, a part-time job could help.
Save up a large down payment
Taxes, government fees and dealership fees usually tack on an additional 8% to 10% of the vehicle’s value to your out-the-door price. That can add up if you’re trying to make a 20% down payment. Here’s how to save for a car down payment without scrimping.
Finding a great deal on a car could help you to qualify for a loan. Lenders look at the loan-to-value ratio of any car. If your loan is less than the car’s value, that’s less risky to the bank. You may be able to find a great sales price, significant rebate or both on a new or used car.
- Autopay discounts: Check with your bank or credit union — not only might it approve you when others won’t, it might give auto loan discounts when you make car payments directly from your checking or savings account. Autopay also ensures payments are made on time, which can help you build credit.
- Alumni or student discounts: Some educational institutions or alumni associations work with dealerships and lenders to get special rates for their students. Check with your school.
- Negotiate: If a lender rejects your auto loan application, ask what it would take to qualify. Maybe you could pad the down payment or bump up your GPA next semester.
Alternatives to student car loans
There’s more than one way to buy a car or get transportation.
- Conventional car loan: This may be the best choice if you have a cosigner and you want to get a car model that doesn’t qualify for a student auto loan program.
- Cash: You may be able to buy a used car directly from a private seller for the same amount of cash that you planned to use as a down payment on a new vehicle. See more about how to buy a car on Craigslist.
- Help from friends and family: If you’re between a rock and a hard place financially and need on-demand transportation, friends and family may be able to help by lending money, being a cosigner, providing rides or helping you find a job or a good car in your budget.
- Car sharing: Car-sharing services like Zipcar and Turo allow users to rent a car by the hour or the day. Ride-sharing services like Lyft and Uber could also get you where you need to go. With both types, you only pay for the car when you need it.
- Public transportation: This may be an obvious alternative, but public transportation is typically a less expensive way to get around, even though it can be much less convenient.
- Biking, motorcycling, scooting and more: Other modes of wheeled transportation could be more cost effective and offer more on-demand convenience than public transportation. A motorcycle could be a much less expensive way to get around.