4 Cost-Effective Alternatives to Pricey Car Loans for Students

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While in college, you may consider buying a car to get across campus, head home on the weekends or drive to work. Some lucky students get generous financial assistance or a hand-me-down car from their parents; others may need to figure out a way to finance a big-ticket purchase on a student budget.

You’ll likely see ads for car loans for college students. But these loans can come with big drawbacks, including sky-high interest rates. Here’s what to know about car loans for college students, and other alternatives to get you the wheels you need.

Car loans for college students

In order to get the most competitive interest rates on car loans, it’s important to have good credit history, as well as proof of income. If you don’t have either, or if your employment is sporadic based on your school schedule, you may be ineligible for a traditional loan on your own.

Because most conventional lenders won’t lend to student borrowers, there are many alternative lenders that offer car loans to students. Although they can help you access money for a new car, these loans’ interest rates can be extremely high. That’s because alternative lenders are taking a higher risk by giving loans to students, so they compensate for that risk by charging much higher interest rates. Subprime borrowers — meaning those with lower credit scores and incomes — could see annual percentage rates (APRs) as high as 25%, according to an analysis by ValuePenguin, which, along with Student Loan Hero, is owned by LendingTree.

By contrast, prime borrowers — those with good credit — could get a used car loan at an APR of just 4.95%. And those with excellent credit may be able to get a car loan with an APR of 2% or 3%. That difference can cost you thousands of dollars.

For example, say you want to buy a used car for $10,000 and take out a 60-month loan to cover the cost. At an interest rate of 25%, you’d pay back $17,611 over the life of the loan — nearly double the car’s initial price. If you qualified for a loan at 4.95%, you’d repay just $11,309. That $6,302 in savings could make a big dent in helping you achieve other 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 already have a solid credit history, you can skip car loans for students and pursue a conventional loan instead. Banks, dealerships and credit unions may work with you if you have proof of income and can show that you can afford the monthly payments. If you apply for a conventional loan, you may get more competitive terms than those an alternative lender will offer, including lower interest rates. A car loan calculator can help you research potential rates and terms.

You may find your credit isn’t strong enough to qualify you for the most competitive conventional loan interest rates. Consider working on improving your credit score and applying for a loan once your score has hit the good-to-excellent range, which is 670 or higher, according to FICO. You’ll have access to lower interest rates at that point.

Make sure you can afford the car you want before taking out a loan. Consider how student loan payments after graduation might affect your budget. Also consider whether you truly need a car for the next few years, and whether forgoing a car and using short-term rentals or other transportation options could be better if you’d rather wait until you’re anchored in one place to buy a vehicle.

One option to avoid is using your student loans to buy a car. That’s because cars are not considered acceptable educational expenses under the federal student loan program. Interest rates for student loans may also be higher than what you could get for a conventional car loan, making getting a car loan with student loan money even more expensive.

2. Consider a cosigner

If you can cover car payments and insurance but lenders won’t approve you for a loan, getting a cosigner could be the solution.

A cosigner should have stable employment and good credit, and they will be responsible for payments if you can’t make them. That means if you fall behind on the payments, your cosigner’s credit will be negatively affected.

Sit down with your cosigner and discuss any questions you both have: What if you lose your job? What concerns does your cosigner have? Will there be a point when you decide to refinance the loan to remove your cosigner? Asking these questions can help ensure everyone is on the same page and that your cosigner is aware of the risks of joining you on the loan.

3. Save for a cheap car

It’s tempting to buy your dream car now, but waiting until you’re settled in a job can help you truly assess your budget. The average price of a used car in the first quarter of 2019 was $20,247, according to a report by Edmunds, but it’s possible to get a used car for under $5,000. If you have the cash — or have family members willing to gift money to help you pay — it could help you avoid taking out a car loan altogether.

You can look online for a cheap car, but the best deals might be found from your social network: Ask your friends, family, and even professors or neighbors if they know anyone who’s selling. If you need to save up cash for your wheels, make money by picking up a side hustle.

4. Research car sharing

If you need to get around town, using services like Uber or Lyft can cut down the need for a car. Although using rideshare services could get 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 or Lyft, 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 to commuting to a job and 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 pay $20 round-trip, you would spend $400 a month on rideshare services. You may also look into carpooling options, like Waze Carpool. It’s an app that connects you to people with a similar daily route as yours.

There are also other car-sharing options such as Zipcar, Car2Go and Turo, which allow you to get a car when you need it. This may be a good option if you primarily need a car on the weekends for errands and outings, but tend to have it sit in the parking lot during the school week.

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 may be the largest expense you face at this point in your life. That’s why it’s important to run numbers, consider options and think ahead: The right car for you now may not be the right car for you in a few years. And while a student car loan may get you the money you need now, it may end up costing you thousands of dollars of interest you could have avoided.

Anna Davies contributed to this report.