How To Buy A Car As A Student

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If you’re a college student looking to buy a car, you may have found it a bit more challenging than you expected. While car loans for college students exist, many lenders are wary of lending money to first-time car buyers or those with limited credit history. Still, college student car loans are possible — especially if you have a reliable source of income, good grades or a trusted friend or family member to co-sign for you.

What to know about student car loans

An auto loan lets you borrow money from a lender specifically to purchase a vehicle. Borrowers then pay that amount back with interest in fixed installments over the length of the loan. These loans typically consider credit score, income and debt-to-income ratio to determine which rates the borrower qualifies for. Outside of looking for student-specific auto loan programs, which some financial institutions offer, look for lenders with flexible acceptance criteria.

For instance, the lender may allow you to add a co-signer, or it might have less stringent income requirements. Some lenders also use a good GPA to help determine eligibility or use good grades for perks like discounts and lower interest rates. It is also smart to look out for lenders with additional discounts available, like no fees or flexible loan terms, to keep payments low.

How to buy a car as a college student

Even if you’re a student or someone else with a limited credit history, there are options to finance a car. While you may not have as many options as someone with a long-established job and credit history, it is possible.

The process of finding a car loan as a student looks just like the process would for a postgraduate driver looking to finance. But as you may be on a tighter student budget, finding a good deal matters. This is even more true as average monthly payments for used cars at $525 and new cars even steeper at $734 in the second quarter of 2024, according to Experian. Follow these steps when you start your car buying process.

1. Figure out a realistic budget. Use a car payment calculator to determine how much you can afford to spend each month. When budgeting, focus on the vehicle’s out-the-door price rather than just the sticker price.
2. Save for a down payment. While saving for a down payment could be a challenge as a student, it can mean lower rates and monthly payments. If you have time to wait, the best-case scenario is to save at least 20 percent of the purchase price. But even if you can’t afford that amount, aim for at least a small down payment.
3. Lock in financing. It is smart to apply for loan prequalification ahead of car shopping — in person or online — to ensure you know the amount you can afford and skip out on dealership markups. Depending on the lender, prequalification will mean a soft credit pull. You should also be prepared to share the necessary documentation to confirm the information you provide.
4. Negotiate. Negotiating with a dealer can be very intimidating, especially for a young person. When car buying as a student, it is wise to bring a trusted adult or family member with you. This way, you feel more confident to push for the deal you deserve. But no matter what, remain confident and do not be afraid to walk away.

Unique challenges for students wanting a car loan

As a college student, securing a car loan is not as simple as it might be for a driver with a more firmly established credit history and salary to show lenders. The majority of lenders use an applicant’s credit score and history as a measure of borrowers’ ability to pay off their loans. Without that, students wanting a car will face a number of challenges.

Little to no credit history

As a college student, it is unlikely that you have an extensive history of credit under your belt. And with the length of your credit history making up 15 percent of your FICO credit score, this can be challenging to overcome.

One workaround here is to add a co-signer. Adding a trusted co-signer who has a more lengthy history of credit and higher credit score can help your approval odds. Keep in mind that your co-signer is also legally responsible for your car loan. If you’re not able to make the payments, it could cause friction in your relationship.

Lack of income

Lenders also like to see regular income to prove that you can handle the monthly payments. If you’re in school, you might have fluctuating income depending on how much you work during a given semester. Adding a full-time working co-signer can help prove that someone with dependable income is backing the loan.

Higher interest rates

The combination of a smaller history of credit and low income can result in steep interest rates, even if you can qualify on your own. Lenders primarily use credit and income as determining factors for your auto loan interest rates. This means that you might be stuck with high rates, which can mean more expensive monthly payments.

How to improve your chances of loan approval

As with any loan, the most competitive rates, terms and acceptance are given to those with strong credit. And as a student with a small amount of credit history, approval can be a challenge. But there are a number of ways to improve your chances of approval when you’re buying a car as a student.

• Show a reliable source of income: The best way to get a car loan as a student is to show a reliable source of income to prove you can make the loan’s monthly payment. If you have a job and a history of at least a few months of income, you will increase your chances of being approved.
• Talk with banks or credit unions where you already have accounts: If you don’t have a reliable source of income, or your income is seasonal or erratic, you may have trouble getting a car loan from most lenders. If you have an account with a local bank or credit union, you might reach out to it. It may offer student car loans or other programs targeted at people in your situation.
• Get a co-signer: Another option is to get a trusted friend or family member who boasts high credit, income or longer employment history to co-sign for your car loan. When you have a co-signer, the lender will also look at your co-signer’s credit history and income.
• Get good grades: Similar to lenders considering credit history, a rare few lenders say they’ll use your GPA as a measure of creditworthiness. If you carry a strong GPA, consider sharing that with potential lenders. Because while not all will factor it, in some cases, good grades could mean more competitive rates or discounts.

The bottom line

While it can seem challenging to get car loans for college students, it is possible. Do your homework to find a good car and explore getting a co-signer, if possible. You’ll also want to talk with various lenders to compare rates and find the best possible deal.