Buying A Car With Student Loan Debt- all you need to know

Are you planning to buy a car while repaying your student loan debt but you are not sure as to how to go about it? In this Article, we shall discuss about how to budget & choose the best auto plan. We shall also discuss how student loan affects the buying behavior and if it is worth it?

Updated by Shrestha Dey on 20th February 2020

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Student loans are a huge burden in itself. But, fresh out of college, students need to attend a lot of interviews in case of job hunting and getting to and back from work. Unless it’s a bigger city with good public transportation service, it is a hassle to get to places. In such cases, a car is a must. But, with exorbitant student loans and rising prices of cars, buying a car is a task in itself. In this article, we shall discuss all about how to get an Auto Loan/ Car Loan while already in debt of student loans.

Table of Contents

Budgeting For Buying & Downpayment of A Car Loan

It is always advisable to buy a car in cash if you already have a burden of student loan repayments. But, more often than not, savings is rare, especially with the amount of savings required to buy a car. In such cases, an auto loan is the only option. With some budget planning and research, it is possible to get an auto loan that fits your bill perfectly. Let us discuss a few key points below:

  • Calculate your Net Income. Net income is basically the amount an individual earns after subtracting taxes and other deductions from gross income

  • Make sure your expenses do not exceed your net income. Track your spending behaviour. Cut down on miscellaneous expenses so as to increase your savings

  • When you plan to buy a car, make sure you incorporate insurance to your budget. Driving without insurance is illegal

  • Create a timeline. As the number of payment increases on the principle amount, the payment amount will decrease eventually, helping you save up for your car

  • Have a graduated savings plan. This means that you can invest most of your income on repaying loans, while saving the rest towards buying your car


Tips on how to choose the Best Auto Plan

Buying a car and shopping for a loan both need serious time investment and a lot of research and planning and is also confusing at the same time. Here are a few tips to help you scout for the best car loans:

  • Always focus on the total cost . Most lenders will try selling expensive cars that are way out of your budget with enticingly low monthly payments. However, your total cost is not just your monthly payments. Your total cost = price + car interest. 

  • Avoid lenders or auto plans that offer subprime loans or pushes for extended terms. Subprime loans are offered to borrowers who do not qualify for conventional loans because of low income, poor credit score or high loan to value ratio

  • Pay attention to APR. Annual percentage rate is the annual amount that is charged every year on and above your interest rate for borrowing a loan. A low APR will help you save thousands of dollars over a span of several years. It is important to remember that a short term loan will mean high monthly payments but less interest paid overall and a long term loan will mean low monthly payments but more interest paid 

  • Get a Pre-approval from the lenders. Pre-approval is a quote sent by the lenders which is basically an estimated detail of the amount you will borrow, the interest rate and the loan term. Pre-approval helps you decide which lender and loan to choose from and makes it easier to budget for the car loan

  • Try applying for all car loans over the span of two weeks. Credit score takes a hit if you apply for loans over the span of a year. Whereas, if you apply for loans over the span of 2 weeks, all your loans will count as one enquiry.

  • Remember shopping for car and car loans are entirely two different things. Seperate the cost of the two


How does Student Loan affect getting an Auto Loan

Getting a car loan when you already have a student loan can be a task in itself. Certain factors that can affect your chances of getting a student loan are as follows:

Debt to Income Ratio (DTI)

Debt to Income ratio = monthly debt payments divided by gross monthly income.

Student loan debt affects your DTI ratio affects your DTI ratio like any other loan. High DTI means your monthly expense towards loan repayments is higher than your monthly income. 

Lenders consider your DTI as a deciding factor to assess your eligibility for car loans. Your DTI ratio should be less than 36%. In case, you have a DTI which exceeds 36% and yet you want a car loan, you can always work towards improving your DTI by the following ways: 

  • Student loan refinancing is a great option to lower your DTI. refinancing allows you to lower your monthly student loan payments which in turn lowers your DTI. When the monthly payments are lowered, it helps you invest more money towards saving for that car loan

  • Increasing your income is another good option to lower your DTI. In case of an appraisal or promotion, your DTI will automatically improve. You can find other ways to lower your DTI by doing multiple jobs in case there’s no scope of promotion or appraisal.

  • Decreasing your debt is another great way to improve your DTI. Cutting out on unnecessary expenses from your monthly income and allocating that amount towards debt repayment is a great way to reduce debt at a faster pace

  • In case of federal student loans, the borrower is eligible for Income Driven Repayment. It is important to note that many lenders do not have proper understanding of how IDR actually works and may miscalculate DTI. IDR is a great way to lower your DTI.

Credit Score 

Your credit score is dependent on your payment habits. You will have a high credit score only if you make regular on time monthly payments failing which your credit score will take a hit. Lower the credit score, lower are your chances of getting a car loan approved.

When you see advertisements of 0%  APR or no down payments, remember these are applicable to only those with really high scores. 

Lower your credit scores, lower are your chances of getting a good loan or even if you get a loan approved, you’ll have to pay more interest on the loans compared to someone who has a good credit score.

Like any other loan, student loans affect your credit score depending on your payment habits.

In case of poor credit scores, following tips can help you improve your credit score and help you increase your chances of getting car loans approval:

  • Pay your monthly student loan payments on time. Never miss out on any payments. Enroll in autopay to make sure that your monthly payments are always on time.

  • Pay off your monthly payments as soon as possible. One of the ways to do so is by adding a little extra to your monthly payment amount. By cutting out unwanted expenses, you can add that saved up amount towards paying off your debt

  • Keep a tap on your credit score. Keep checking it on regular intervals. If you come across any negative remarks, make sure to register complaints and get it resolved as soon as possible. 


Worried about your college tuition? Find the best student loans here


Is Buying A Car When In College Worth It?

Federal student loans cannot be used for any other purpose other than educational purpose. It is also not a good idea to use up your private student loan cause lenders often loan out on subprime basis which can have an APR as high as 29.99%. Just to give you context, a borrower with a good credit score can loan out with an APR as low as 5.29%.

A car, however, becomes a necessity for a student when their boarding is off campus and far from their educational institution. For students working off campus too, a car is the easiest way to commute in order to save up time. In such unavoidable cases, you can opt for the following:

 

  • Co-signer : You can opt for a co-signer. With a co-signer, you can qualify for a better loan. In this case, the co-signer has to be a relative, preferably a parent with a good credit score and proof of income. The co-signer takes up the responsibility of paying off your debts in case you fail to do so

 

  • Conventional Loans: Instead of student oriented car loan, you can be eligible for standard auto loan provided you have a good credit score, decent DTI and proof of income.

 

The following tips can help you save up for a Car Loan while studying in college:

  • Make maximum utilization of campus amenities. They are free for students and also cost effective

  • Opt for cost effective housing  

  • Check with local banks for special accounts for students

  • Avoid miscellaneous expenses like eating out, look out for discounts etc. 

In the end, shopping for a car loan when you already have student loans is all about being smart. Before shopping for a car loan, be well informed. Consult as many lenders as possible, compare the rates, do your research well and plan your finances well. Most importantly, know your true budget and don’t get allured by attractive low monthly payments for really expensive cars that are way beyond what you can actually afford and can drive you towards more debt.