What college students should know when applying.
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What types of car loans are available to students?
There are two main car loan types to choose from.
- Secured car loan. Secured car loans usually have lower interest rates because your car is used as collateral. If you default on the loan, the lender has the right to repossess the vehicle. Check that your car is eligible before applying as some lenders place restrictions on a car’s age and condition.
- Unsecured personal loan. If you want to purchase an older car or get a loan that covers more than just the cost of the car, consider an unsecured personal loan. You’ll likely need a strong credit history for an unsecured personal loan because they’re more of a risk for lenders. Interest rates may be higher, but if you default on the loan you’ll still have your car.
How to compare student car loans
When comparing student car loans, consider:
- Interest rate. Get the most competitive interest rate by applying to a number of different loan providers.
- Fixed or variable rate. With fixed rates, your repayments stay the same for the entire loan term, but fixed loans tend to come with more restrictions on early repayments. Variable rates change throughout the life of the loan, but you usually get early repayment flexibility.
- Fees. Take a look at the upfront and ongoing fees to get an idea of how much the loan will cost.
- Repayment flexibility. Are you able to choose how often you make payments? Can you make additional payments without penalty? Can you repay the loan early without penalty? These are things to look out for.
- Features. Does the loan offer any additional features? Some of these may include a preapproval, online account management, a car-buying service to help you find your car or discounts on other products and services.
7 steps to get a car loan as a student
Finding a car loan is pretty straightforward. Here’s how it works:
- Consider preapproval. Before deciding which car you want to buy, see how much you can borrow by applying for preapproved loan. This can give you more bargaining power at the dealership or an auction.
- Find a car. For private sales, look on car sales sites and the newspaper, or head to a dealership. Find a car that’s within your budget and in good condition.
- Compare your loan options. Start comparing your loan options once you’ve found the car you want or have an idea of what you’re looking for. Consider the interest rate, fees and features of the loan to find one that’s right for you.
- Check the eligibility criteria. Even if the loan sounds right, you may not meet its eligibility criteria. Lenders usually require you to be older than 18, earn a regular income and be employed. Your car will also have to meet eligibility criteria.
- Get your documents in order. Gather all the required documents that include a form of ID, pay stubs and information regarding your employment and finances (income, expenses and debts). Once you choose your car, submit the make, model and year, VIN number, registration number and purchase price.
- Submit your application. Depending on the lender, you may receive an instant response. Other lenders may take a few days to review your application and fund your loan.
- Buy your car. This can happen in a few ways. The lender may pay the dealer or private seller on your behalf or you’ll get funds to pay the seller directly.
What criteria do car lenders have for used cars?
8 helpful tips for applying
If you’re a student you may be working part time, be on a lower income or have a limited credit history. This can make it difficult to get a car loan. Use the guide below to find out how to get approved for a car loan.
1. Build your credit history
Your credit history is important in order to be approved for a car loan you can afford. If you’re in college, you may have a short credit history — or none at all. A couple of ways to build your credit history are:
- Pay your existing bills on time, including your phone and utility bills.
- Order a copy of your credit file — you can receive it free once a year from the three major credit bureaus, Equifax, Experian and TransUnion.
- Don’t open and close credit accounts frequently; let your accounts mature.
- Keep you credit utilization ratio under 30%. For example, if your credit limit is $1,000, keep your balance below $300 — 30% of your limit.
2. Have a reliable income
Lenders want to see that you have a steady stream of income to show that you’ll have the means to pay back the car loan without missing payments. Income requirements for lenders vary, so it’s smart to ask what counts as an eligible income before applying.
3. Confirm eligibility criteria
In most cases, you’ll need to be 18 years or older and a permanent US resident. If it’s a used car, it may need to meet certain requirements. For example, lenders have guidelines around the condition, year and model of the car before they’ll provide financing.
4. Save as much money as you can for a down payment
A larger down payment shows that you have control of your finances — and can reduce your monthly payments and overall loan amount.
5. Consider a cosigner
A cosigner — a parent or other adult that trusts you — can sign on to your loan, getting you a better interest rate. Your cosigner agrees to take on the legal and financial responsibility for your debt if you’re unable to make payments. Make every effort to make your payments so you don’t jeopardize you or your cosigner’s credit.
6. Refinance your initial loan
If you’ve had a loan for a year or two and have been making steady payments and growing your credit score, you’ll likely benefit from lower interest rates and loan terms by refinancing your loan.
College is expensive, with classes, books and other living expenses. When you’re taking on a car loan it’s important to factor in every cost that comes with it. Make sure you’ll be able to afford car insurance, gas and maintenance.
8. Negotiate the loan
A lender may try to win your business if they know you have other options. Ask about lowering the interest rate an flexible loan terms including early repayment without penalty. Any fees waived or discounts you can get equals money saved.
Ready to choose the perfect car?
Since this is probably your first car purchase, you may want to stick to an economical car. Here are some tips that can help you narrow down what you need:
- Shop around
- Attempt to haggle or bargain
- Ensure the vehicle you want meets the loan requirements
- Buy the first car you see
- Accept for the first loan offer you receive
- Apply for every loan available — narrow down your choices to three