Owning a car can make daily commute easy and convenient for students. Unfortunately, financing a vehicle as a student can be tricky. Some even advocate that they should avoid availing a car altogether—as it can lead to added financial strain and debt.
However, by following the proper steps and making informed decisions, students—like you—can successfully finance a vehicle. This post will show the step-by-step process for funding a vehicle as a student. And by the end, you’ll clearly understand how to do it independently and have the confidence to make the right choices regarding your car purchase. Continue reading below.
Determine How Much Car Payments You Can Afford
Determining how much you can afford can let you set a workable budget and avoid spending too much. To do that, consider your income, expenses, and other financial obligations, such as tuition and rent. Of course, be sure to exclude any bills someone else is covering (e.g., tuition paid by your parents).
Here’s an example. If your monthly income is USD$2,500, and your expenses (including rent, utilities, and other bills) amount to USD$1,500, you may have USD$1,000 left over for car payments and insurance. You’ll need this information later as well when dealing when a lender, so be accurate with your computations.
Do note that foreign students can also use most of these steps to process their international students car loans.
Check Your Credit Score
Your credit score determines your creditworthiness and potential interest rates for car financing. The higher your score, the more lenders are comfortable giving you money. If you have a low score, they may lend you but with a higher interest. Your financing options will become limited as well.
For those unfamiliar, your credit score is based on how you use money—often tracked through your credit card and other financial transactions. At this point, you have a score already since you’re probably earning and spending money.
Knowing your credit score by having a look at your credit score company. You can also access it through free credit score monitoring tools. The scores these bureaus may provide you with may be slightly different. Nonetheless, when they give you your score, they’ll tell you if you have a good or bad rating too.
If you have a bad credit score, you may put off getting a car and focus on improving your credit score first.
Research Lenders
Once you know that you have the financial capacity to take a loan and have a good credit score, the next step is finding a lender. Every lender has different financing options for your needs and budget, so shop around. Start by looking at local banks, credit unions, online lenders, and car dealerships.
For example, a credit union may offer lower interest rates and flexible terms than a traditional bank or online lender. Researching multiple options can help you find the lender with the best financing terms for your situation.
Compare Interest Rates
As you look for a lender, you’ll become more familiar with financing. You have the term, principal, collateral, and, most importantly, the interest.
Remember your credit score? Aside from using your credit score as a primary deciding factor if a lender will let you borrow, it can affect how much interest they’ll require of you too. Because every institution may have different policies and calculations, you must find one that can demand a reasonable interest rate.
To compare interest rates, you can get quotes from multiple lenders and compare the Annual Percentage Rate (APR) they offer, which includes both the interest rate and any fees associated with the loan. Suppose that one lender offers an APR of 5% and another has an APR of 6%. Choosing the first lender could save you hundreds or even thousands of dollars over the duration of the loan, as a percent difference in interest can quickly inflate the amount you need to pay.
As a warning, some lenders are predatory. They may impose impossible interest rates, and you might become a victim if you don’t shop around. Practice caution.
Get Pre-Approved
One of your goals in financing a car is to get pre-approved. Being pre-approved lets you know how much you can afford to borrow and helps you negotiate with the dealer or seller.
Getting pre-approved requires submitting information about your income, expenses, and credit history to a lender. Once they receive those details, they’ll give you conditional approval for a specific loan amount and interest rate. Note that the amount you can loan depends on them.
Once done with this process, you can confidently go to the dealership knowing your financing is already in place. And you’ll be able to negotiate a better deal on the car price or shop around for a better deal on your loan before signing anything. After you sign up and get the car, all that’s left is to pay the loan.
Conclusion
Financing a car as a student can be challenging, yet it can bring great rewards for independence and mobility. While it’s essential to be cautious and make informed decisions when financing a car, it’s important not to overstate the risks or let fear hold you back as well.
Moving forward, remember to do your research, determine your budget, and choose a lender and car that meet your needs and financial situation. With the proper steps and perseverance, you can successfully finance a vehicle as a student and enjoy all the benefits of car ownership.