When you’re in college, having a car on campus is a big deal. Take Michigan’s Wayne State University, for example: 98 percent of their students bring a car to campus. If your school is in a small town or rural area, a car is necessary for off-campus jobs, grocery shopping, or just taking friends to the movies.
However, if you don’t already have a vehicle (or your parents’ help), you likely can’t afford to pay cash for new wheels. Instead, you’ll need to take out a loan to buy a car. As a student, that can be difficult.
While there are student car loans available, there are serious drawbacks to pursuing that kind of loan. Here’s why, and some alternatives to car loans for students.
Car loans for college students
There are many options for financing a car. The problem? As a student, you likely don’t have an extensive credit report or a large salary. If you have bad credit (or no credit at all) and only a small income, most banks or credit unions won’t work with you until your financial situation improves.
Because most conventional lenders won’t lend to student borrowers, there’s a whole cottage industry of alternative lenders who offer car loans for students. Although you can get the money you need for a new car, the terms of these loans can be outrageously expensive.
Those lenders are taking more of a risk by giving loans to students, so they compensate for that risk by charging much higher interest rates. As of August 2017, subprime borrowers — meaning those with lower credit scores and incomes — could see an annual percentage rate (APR) as high as 29.99%.
Prime borrowers — those with good credit — could get a used car loan with just 5.29% APR. That difference can cost you thousands.
Say you want to buy a used car for $10,000 and take out a 60-month loan to cover the cost. With a 29.99% rate, you’d pay back $19,408 over the length of your loan — nearly double what the car actually cost.
By contrast, if you qualified for a loan at 5.29%, you’d repay just $11,403. That $8,000 in savings could go a long way in helping you achieve your financial goals.
4 alternatives to car loans for students
Car loans for college students can end up being costly. These four options could help you avoid pricey loans or eliminate the need for your own car entirely.
1. Pursue a conventional loan
If you have a job while in school and have already established a solid credit history, you can skip the student car loans and pursue a conventional loan instead. Most banks, dealerships, or credit unions will work with you as long as you have proof of income and can show you can afford the payments.
If you apply for a conventional loan, you’ll get more competitive terms, including much lower interest rates. To sweeten the deal, some dealers offer special incentives for college students or recent graduates. However, make sure you can afford the car before taking out a loan.
If your credit score isn’t quite good enough, it might be worth waiting a few months to improve your credit score and apply for a loan after. You’ll get lower rates and save money over time.
2. Consider a co-signer
If you can cover the car payments and other vehicle costs but lenders won’t approve you for a loan, a co-signer could be the solution.
A co-signer is a relative or close friend with stable employment and good credit. With them co-signing the loan, you might be more likely to get approved.
However, only pursue a co-signer if you’re sure you can handle your expenses. Your co-signer’s name will be on your debt; if you fall behind on the payments, your co-signer’s credit will be negatively affected, and the lender could go after them for payments.
3. Save for a cheap car
As a student, it might be worthwhile to ditch the vision you have of the perfect car. While you might dream of a sleek sports car or cute coupe, they’re probably out of your budget. Instead of something flashy, consider a cheap little car that’s perfect for puttering around your college town.
You can often find an inexpensive used car with plenty of life still in it for as little as $3,000. It might not be the prettiest thing, but it’s much more likely to be within your budget. Best of all, it would help you avoid shady car loans for students.
If you need to save up, you can make money for your car fund by picking up a side hustle when your schedule permits.
4. Research car sharing
If you need to get around town, using services like Uber or Lyft can help eliminate the need for a car. Whether you need to go to the pharmacy or your friends want to check out a restaurant across town, rideshare services can provide you with convenient transportation.
Although using rideshare services can be expensive, it could be more economical than owning a car. If you purchase a vehicle, you have to cover the sale price and pay for insurance and gas. Instead, if you use Uber, 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 going to the grocery store, commuting to a part-time job, or hanging out with friends. Then, use the Uber or Lyft app to get a ride quote for each trip.
For example, if you commute to work five days a week and it costs $20 round trip, you would spend $400 a month on rideshare services. If you can find a cheap car, you could buy one with a much smaller monthly fee, even with the cost of insurance.
However, if you only use a car once in awhile, using a rideshare app could be more cost effective. Do the math and make sure owning a car is worth the cost — you might be surprised at what you find.
Buying a car when you’re in school
Deciding to buy a car while still in school is a huge decision. A car is likely the largest expense you’ll ever face after paying college tuition or buying a home. If you choose the wrong student car loans to finance your purchase, it could cost you thousands more in interest.
If you’ve never bought a car before, the process can be a little tricky. Here are some pointers on getting a great deal on a car.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000||Visit Upstart|
|5.29% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|
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