It’s no secret that students can have a hard time qualifying for car loans. Between having short or non-existent credit histories and erratic income, it can be extremely difficult to find a bank that is willing to take a chance on a student and give him or her a car loan. Fortunately, there are several ways to convince a bank to loan a student money.
A lack of credit history is the biggest problem that many students encounter when they apply for a car loan. While no one knows the exact formula, it is believed that the length of credit history can compose somewhere between ten and thirty percent of a credit score. That means that if a student has not started to borrow money or has only recently received his or her first credit card or student loans, his or her credit score could be very low.
Furthermore, in order to qualify for a loan a person has to be able to show several months of steady income. Unfortunately, most students don’t have a steady income. Many students work a lot of hours when they are out of school, then cut their work back dramatically when classes start. While this can allow them to save up enough money to meet car payments, it can make it next to impossible to find a bank that is willing to give them a loan.
Fortunately, there are several ways that a student can get a loan. To start, many banks are willing to offer loans as long as the student provides a significant down payment. The bank views this as making the student more vested in the vehicle, since he or she would lose their money if they stopped making payments and the car had to be repossessed. Typically, a person will need to have at least twenty percent of the total price of the car available to offer as a down payment.
In lieu of this, there are still several other options. It is also possible to find a loan with a higher interest rate. With poor credit and a spotty income, it will be hard to qualify for the best rates, but there are loans available for people with bad credit. The interest rates on these loans is several points higher than the best rates, however, meaning that a student will pay more in interest and have to make a higher monthly payment than they otherwise would have.
The best option for many students is to find a cosigner or guarantor. This person signs on the loan along with the student. This allows a bank to offer a loan at a lower rate, since the guarantor agrees to make payments in the event that the student no longer can.
Typically, the student’s parents are used as guarantors, but anyone can take on this role. The guarantor has no costs to pay, and there is no paperwork for him or her to deal with after signing the initial loan documents.