While in school, you may want to consider buying a car to drive across campus, drive home on the weekends, or drive to work. Some lucky students receive generous financial aid or a used car from their parents; others may need to find a way to finance an expensive purchase on a student budget.
You will likely see advertisements for student auto loans. But these loans can come with big drawbacks, including exorbitant interest rates. Here’s what you need to know about student auto loans and other alternatives to get you the wheels you need.
Auto loans for students
In order to get the most competitive interest rates on auto loans, it is important to have a good credit history, as well as proof of income. If you don’t have either, or if your job is sporadic depending on your school schedule, you might not qualify for a traditional loan on your own.
Since most conventional lenders do not lend to student borrowers, there are many alternative lenders that offer student auto loans. Although they can help you get money for a new car, the interest rates for these loans can be extremely high. This is because the alternative lenders take a higher risk in providing student loans, so they compensate for that risk by charging much higher interest rates. According to an analysis by ValuePenguin, which along with Student Loan Hero is owned by LendingTree, at-risk borrowers – that is, those with lower credit scores and lower incomes – could see annual percentage rates (APR ) reach 25%.
In contrast, senior borrowers – those with good credit – could get a used car loan at just 4.95% APR. And those with great credit can get a car loan with an APR of 2% or 3%. This difference can cost you thousands of dollars.
For example, suppose you want to buy a used car for $ 10,000 and take out a 60-month loan to cover the cost. At 25% interest, you would pay back $ 17,611 over the life of the loan, almost double the original price of the car. If you qualified for a 4.95% loan, you would only pay back $ 11,309. That $ 6,302 in savings could help you reach other financial goals.
4 alternatives to auto credit for students
Auto loans for students can end up being expensive. These four options could help you avoid expensive loans or eliminate the need for your own car altogether.
1. Pursue a classic loan
If you have a job while in school and already have a strong credit history, you can skip student car loans and take out a conventional loan instead. Banks, dealers, and credit unions can work with you if you have proof of income and can show you can afford the monthly payments. If you apply for a conventional loan, you can get more competitive terms than any other lender, including lower interest rates. An auto loan calculator can help you research potential rates and terms.
You may find that your credit is not strong enough to qualify for the most competitive conventional loan interest rates. Consider working on improving your credit score and applying for a loan once your score hits the good to excellent range, which is 670 or higher, according to FICO. You will then have access to lower interest rates.
Make sure you can afford the car you want before taking out a loan. Think about how student loan repayments after graduation might affect your budget. Also figure out if you really need a car for the next few years, and whether forgoing a car and using short-term rentals or other transportation options might be best if you’d rather wait to be anchored in the same spot. to buy a vehicle. .
One option to avoid is to use your student loans to buy a car. This is because cars are not considered an acceptable educational expense under the federal student loan program. Student loan interest rates can also be higher than what you might get for a conventional car loan, making getting a car loan with student loan money even more expensive.
2. Consider a co-signer
If you can cover payments and auto insurance but lenders don’t approve you for a loan, having a co-signer might be the way to go.
A co-signer must have a stable job and good credit, and they will be responsible for payments if you cannot make them. This means that if you fall behind on payments, your cosigner credit will be negatively affected.
Sit down with your co-signer and discuss all the questions you both have: what if you lose your job? What are the concerns of your co-signer? Will there be a time when you decide to refinance the loan to withdraw your co-signer? Asking these questions can help ensure that everyone is on the same page and that your co-signer is aware of the risks of joining you on the loan.
3. Save for a cheap car
It’s tempting to buy the car of your dreams now, but waiting until you settle into a job can help you really assess your budget. The average price of a used car in the first quarter of 2019 was $ 20,247, according to an Edmunds report, but it’s possible to get a used car for less than $ 5,000. If you have the money – or if you have family members willing to donate money to help you pay – it could help you avoid taking out a car loan altogether.
You can search for a cheap car online, but the best deals can be found on your social network: ask friends, family, and even teachers or neighbors if they know of anyone who is selling. If you need to save money for your wheels, earn money by choosing a side business.
4. Research carpooling
If you have to get around town, using services like Uber or Lyft can reduce the need for a car. While using carpooling services can be expensive, it could be more economical than owning a car. If you buy a vehicle, you have to cover the selling price and pay for insurance and gasoline. Instead, if you use Uber or Lyft, you only pay a fee for the ride.
To find out if using a rideshare service makes more sense than buying a car, track your mileage for a week. Include everything from groceries to the commute to work and hanging out with friends. Then use the Uber or Lyft app to get a ride quote for each ride.
For example, if you drive to work five days a week and pay $ 20 round trip, you’ll spend $ 400 a month on ridesharing services. You can also consider carpooling options, like Waze Carpool. It’s an app that connects you with people with a daily itinerary similar to yours.
There are also other carsharing options like Zipcar, Car2Go, and Turo, which let you get a car when you need it. This can be a good option if you mainly need a car on weekends for errands and outings, but tend to leave it in the parking lot during the school week.
Do the math and make sure that owning a car is worth the cost – you might be surprised at what you find.
Buy a car when you are at school
Deciding to buy a car while still in school is a huge decision. A car can be the biggest expense you face at this point in your life. That’s why it’s important to do the math, consider options, and think ahead: the right car for you now may not be the right car for you in a few years. And while a student car loan can get you the money you need right now, it can end up costing you thousands of dollars in interest that you could have avoided.
Anna Davies contributed to this report.