Cruising through your 20s and can’t get a car loan to finance a new set of wheels? You can probably thank your student loans for that. Research shows many millennials are putting off buying cars because of student loan debt. It’s easy to see why. If you are burdened with big student loan payments each month and making a lower-than-expected salary, you may not have much money leftover for car payments. Moreover, missed payments can severely damage your credit score. So, if you’ve missed a payment (or two) on your students loans, there’s a chance you won’t qualify for a car loan. Here, we’ll break down how your student loan could be keeping you from a car loan — and what you can do to up your odds of getting one. (Plus, if you’re currently in school and in need of a ride, keep reading: we’ll address whether there are auto loans for students, too.)
How Student Loans Can Make it Harder to Get a Car Loan
A student loan that is in good standing and paid on time is a good way to build a strong payment history. Payment history makes up 35% of your credit score, so good behavior when it comes to paying your student loans is a big plus for your credit. A good credit score can help you get a lower interest rate on your auto loan, which means you pay less over the lifetime of the loan.
But the flip side is also true. If you are late or delinquent on your student loan payments, your credit score can take a nosedive. And qualifying for an auto loan, even if you can afford the payments, is going to be difficult. Or you may qualify, but you may have to pay a higher interest rate, and possibly a larger down payment.
Also, lenders consider your debt-to-income ratio when you apply for an auto loan. If the auto loan payment, or your overall debt, is a large enough percentage of your income, you might get turned down for the loan, or be asked for a larger down payment in order to qualify. The same is true if your credit-to-debt ratio — or credit utilization rate — is too high. Credit utilization is how much debt you are carrying versus how much credit has been extended to you, and it’s the second most important factor when it comes to credit, accounting for 30% of most scores. You generally want to keep the amount of debt you are carrying below at least 30% and ideally less than 10% of your total credit.
How Can I Get a Car Loan With a Student Loan?
Do everything you can to make your student loan payments on time each and every month. If you are having a difficult month due to an economic hardship, reach out to your lender and ask about a deferment or forbearance. Your payments could be postponed or reduced if you qualify. If neither of those programs is available to you, ask about moving to a new payment plan with a more manageable monthly payment amount. Doing so will protect your credit rating, as long as you continue to pay the new plan as agreed each month. You have to apply for deferment, forbearance or a new repayment plan, so it’s crucial you continue to meet your current payment obligations until you’ve been notified your deferment, forbearance or new payment plan has been approved and gone into effect. Failing to do so could make your loans delinquent and damage your credit.
Also, there’s a chance your student loans aren’t the only debt you have on the books, so if you’re carrying a big balance on a credit card, for instance, paying those purchases off could improve your credit utilization rate and bolster your credit score, student loans notwithstanding. (You can find more ways to improve your credit here.)
Curious about how your management of your student loans and other debts may be affecting your ability to qualify for car loan? You can keep an eye on your credit with Credit.com’s free credit report snapshot. You’ll receive two free credit scores with tips and customized advice for improving your credit score.
Are There Car Loans for Students?
For current college students looking for a car loan, things can be even trickier. Student loans generally get reported to the major credit bureaus as soon as they are extended. Since you’re not required to pay them back until post-graduation, you can’t miss any payments — but you also won’t be able to get any credit for making payments on-time. Additionally, your loan balances may have grown with interest, which isn’t great for the “amount of debt” aspect of your credit scores. As such, you may not have the credit to qualify for a car loan.
Moreover, a lender is going to want to see that you have a steady source of income, so if you’re not working while in school, you’re going to face an uphill battle — not to mention, it may not be in your best interest to take on financing. Having said that, if you do have good credit, a source of income and are over 18, you may be able to qualify for a car loan. Here are a few ways students can better position themselves to get auto financing:
- Build your credit. You can do this by applying for a starter credit card, like a secured credit card or student credit card. Making on-time payments and keeping balances low will help you establish your creditworthiness.
- Get a cosigner. It may not be ideal, but having someone with good credit, like a parent or guardian, sign on the dotted line with you will likely make an auto lender more apt to extend financing. Just remember, the cosigner will be held liable for the loan, and any missed payments will also affect their credit score, so if you’re going to go this route, be sure all parties are the same page.
- Save up a big down payment. The more money you can put down upfront, the lower your monthly payments will be and the less risk you’ll pose to lenders — and your own budget.
- Shop around. Be sure to vet any lender properly before filling out applications — and read the fine print so you know all the costs associated with an offer. Remember, while you need a car, you’ll also need to be able to pay the loan back. Not doing so can result in big damage to your credit score and, ultimately, repossession, so shop around for the best rates you can get and only accept financing if you’re confident the deal is good and you’ll be able to make good on the payments.
Additional reporting was contributed by Lucy Lazarony.